Q. I'm sick of paying rent and want to buy my first property. I have no deposit and a bad credit rating. Should I enter into a 'Rent to Own' contract?
A. Short answer is BE CAREFUL!
For those who don't know what a 'Rent to Own' or a WRAP is, let me pass on some pointers:
A Wrapper's client normally is:
* A first homeowner
* Without a deposit
* In possession of a bad credit history
* Frustrated with their current situation
A Wrapper will then:
* Become the bank for the client
* Get a normal rate loan (approx. 7.4%) and pass on a loaded rate (approx. 9.4%)
* Help them find a property in the area they want to live
* Purchase (approx. $250,000) and control this property via contract then
- Re-sell that same property to the client at a loaded price (approx. $290,000)
- Take the client's First Home Owners Grant as well.
If you are a first home owner and looking at this system, you should ask yourself are you happy that Wrappers will take your first home owners grant, load your interest rate and increase/load your property purchase price.
Remember, that if you miss a payment the Wrapper can exercise their right to cancel the contract, evict you and get another first home owner in and make all that money again.
Paul's tip:
Be careful of WRAPS!
Instead, consider buying a cheap property on your own by educating yourself, cleaning up your credit file, saving a small deposit and getting a normal loan. As always when getting into property, you need to be in control from day one.
Source: “Ask Paul” which is a regular feature provided for Your Investment Property Magazine by Property Secrets where you can ask Paul for his thoughts on any of your property investment queries.
