Thoughts on Rent-to-Buy Home Startup Ownhome?

LCeri on 07/02/2022 - 22:56
Last edited 08/02/2022 - 09:58 by 1 other user

Saw an article about Commbank's ventures x15 backing this guys.

Here's an explanation of how it works on 7news as the site is a bit confusing.

On paper you'll get 12.5% equity of the house after 5 years from these guys, whereas 30 year loan will get you 16.67% equity. 12.5% equity for 5 years is pretty much 40 year loan.

Repayments wise, it costs 7.05% p.a. or $70,500 on $1m property, which works out to be almost $6k~ vs almost $4k~ on 2.5% interest mortgage.
1.5% starter fee + 1% equity purchase as opposed to 5-20% normal home loan deposit.

Looks like they cover conveyancing fees, stamp duty fees, and strata/land tax too.
Agreed-price is locked in at the start and grow 3.8% p.a. no matter the actual market growth.

The best part is obviously not paying rent! Of course it's already included in the 7.05% p.a. rate.
The biggest cost seems to be the amount of equity itself 2.5% p.a. with them vs 3.33% p.a. on a 30 year loan.

The property can be purchased after 3-7 years and they aren't a lender, still need to get your own form the bank after. So might still incur LMI depends on how much extra deposit you have by the time of purchase.

Can't find much info on exit without buying, I guess you just give it all up?

I might have oversimplified it a bit, but thoughts?

Their FAQs https://www.ownhome.com/faqs

Financial Commonwealth Bank

Related Stores

ownhome.com
ownhome.com

Comments

  • foxmulder on 07/02/2022 - 23:30
    +3

    70,000 a year 'not rent' and after 5 years (=$350k) you only end up with $120k. Am I missing something?

    • Ceri on 07/02/2022 - 23:47

      Yes. Mortgage interest rates, stamp duty, rent, upfront deposit, LMI cost etc

  • rektrading on 08/02/2022 - 00:03
    +8

    If the customer decides not to buy - they’ll forfeit the equity stake they’ve built up.

    Rekt.

  • tsunamisurfer on 08/02/2022 - 00:35
    +2

    Repayments wise, it costs 7.05% p.a. or $70,500 on $1m property, which works out to be almost $6k~ vs almost $4k~ on 2.5% interest mortgage.

    Lets talk about at the end of the initial 5 year term.

    You would have paid ~$350k and got back $120k in equity, meaning in 5 years you have paid $230k or $46k a year in non equity building payments (lets call it I can't believe its not rent).

    If you had borrowed $1m at the end of the 5 year mark, you would have paid (@ 2.5% steady over 5 years) $115k.

    I'd rather the traditional path thanks.

    • Ceri on 08/02/2022 - 09:49

      Looking at some other cost which is included in 7.05%
      - LMI cost $40k assuming 5% deposit
      - Rent $150k ($30k p.a. assuming $600~ pw on a $1m property in Syd)

      That'd be $190k not including conveyancer, strata and general maintenance they do.
      $305k if we add the $115k 5 year interest rate that you calculated

      • Bigboomboom on 08/02/2022 - 11:39
        +1

        If you go traditional path you don't pay rent.

        This is basically you paying rent and then mortgage on top of that vs traditional mortgage only or rent only.

        • Ceri on 08/02/2022 - 12:43

          Good point. So seems like in 5% home loan deposit would be a much better deal no matter the circumstances then?

          • Bigboomboom on 08/02/2022 - 14:34

            @Ceri: Yes, unless for some reasons you can't get a traditional mortgage.

      • stirlo on 08/02/2022 - 11:40
        +1

        But you don't pay rent when you own with a regular mortgage! So the $150k is irrelevant…

  • donbot on 08/02/2022 - 06:53
    +2

    1. Wait a second, people consider paying $70k/year in 'not rent'/mortgage payments as normal? What am I missing?

    2. Anything with that many fees and 'guaranteed'/agreed price increases to your "favour".. run for the hills.

  • AndyRates on 08/02/2022 - 07:15
    +3

    what happens if this company collapses. who owns the "title"

    • rektrading on 08/02/2022 - 07:24
      +2

      The company sell the assets, pay back the creditors and the clients get cents to the dollar after admin fees.

  • holdenmg on 08/02/2022 - 08:56

    At least with https://www.brickx.com/avenue your name is on the Title.

  • Hugh G Rection on 08/02/2022 - 09:28

    i think this is more for people that have bad credit and can't get approved for a home loan by themselves, and have to use these avenues to be able to get something.

    • Ceri on 08/02/2022 - 09:53

      I reckon it's for people who have trouble saving regularly for a home deposit + LMI and want to get into property market sooner than later.

      • OzCheapo on 08/02/2022 - 10:01

        No this is usury. But then again with so many people outspending their means, there's probably a market for this

  • Seraphin7 on 08/02/2022 - 10:10
    +3

    If I've followed this correctly, you get into one of these arrangements for effectively a 1% deposit plus a 1.5% fee. So on $1m you get in for $25k. OP claims the stamp duty and other costs is covered by the operator … not sure, but let's run with that

    This is as opposed to a deposit ranging from 5% - 20% plus any LMI, stamp duty and other transaction costs. Obviously then on the $1m you're looking at $50k - $200k deposit, stamp duty ~$40k, LMI if applicable of up to ~$40k, plus ancillaries of maybe ~$5k … so maybe ~$135k at the low end.

    So the operator is effectively allowing you to get set for ~$110k less than might otherwise be the case.

    In return, you get charged an effective interest rate of maybe ~4.5% p.a. vs ~2.5% on a "normal arrangement" … that would add up to ~$100k over the five years.

    So we're about square so far.

    You then effectively give up 3.8% p.a. in capital growth, or ~$200k over five years … this appears to be the primary point here. The operator provides the capital upfront that might not otherwise be available to the participant. This enables them to participate in any expected capital growth above this level that would not otherwise be available to them.

    The trick/catch to this is getting to the five year point where the sales price will be ~$1.2m where basically 10% equity exists. Whether or not the participant can muster financing and associated other costs of purchase at that point will be critical.

    For those that effectively have no assets, but presumably a "relatively" high income and who can muster additional equity over the five years, this may be effective.

    For those with relatively high deposits, the "traditional" method will likely be more effective.

    • rektrading on 08/02/2022 - 10:23

      stamp duty

      There is no way the state will allow the buyer to cheat SD if they don't have an exemption.

      • Ceri on 08/02/2022 - 10:32

        Yep apologies for the confusion, still need to pay stamp duty in the end.

        They cover the initial stamp duty (transferring to their name) but buyer would still need to pay it when buying the property off them.
        Assuming it'd be less as buyer would already have equity and thus not pay the full price?
        Wonder if it brings the price down to $800k, people would be eligible for the first home stamp duty waiver? Wouldnt think so but the prospect is interesting

    • OzCheapo on 08/02/2022 - 10:39

      Your monthly payments are tied to the property value, so as the value increases, so will the price

      • Ceri on 08/02/2022 - 12:41

        I believe it's 7.05% based on the initial purchase, so the payments wont increase.

  • JimB on 08/02/2022 - 10:21
    +1

    It's a pretty shit deal for normal people.

    But…. if you can't save for a deposit and rent at the same time, I understand why people can consider it.

    Let's say $700k property, not $1m. Repayments/not rent is $950 a week.

    If the equivalent rental is say $650 a week, it's effectively costing you $300 extra a week for the buy option. The $300 pw gives you a $17,500 p.a. equity vs a price increase of $26,600 p.a.

    You will also benefit from the any house price increase between now and purchase date. If the property goes up by more than 6% p.a., you may be able to avoid LMI after 5 years.

    If you did this 2 years ago, you'll be financially much better off than the normal rent while saving for deposit.

  • Hearthstone on 08/02/2022 - 10:22
    +3

    Payday lending for home owner

  • techlead on 08/02/2022 - 10:30

    Its definitely not worth it. I really don't understand the delusion in owning a property when you can't afford it. Don't FOMO.

    Just rent and invest in good quality assets and you'd have no problems. Don't rent and invest in property, you'd have a very bad time. Property returns has been pretty dismal compared to other investments over the last 10 years. If I invested in property back in 2013 instead of Bitcoin, it would have been a multi million dollar mistake.

    • KaTst3R on 08/02/2022 - 10:33
      +2

      If I invested in property back in 2013 instead of gambling on Bitcoin, it would have been a multi million dollar mistake.

      Here you go, fixed that for you.

      • techlead on 08/02/2022 - 10:38
        +2

        And buying a property at inflated prices with a huge debt is not a gamble? hahahaha, to me property investors are all gamblers, bad gamblers at that because the return is so bad. :D

        Bitcoin has the best risk adjusted return (sharpe ratio) of any asset class over the last 10 years. So if Bitcoin is a gamble, by definition so is property investing and shares because they all have a higher risk for the returns they give.

      • rektrading on 08/02/2022 - 10:40
        +2

        Bitcoin popped $44,000.

        Congratulations to anyone that BTFD @ $33,000 14D ago.

        • techlead on 08/02/2022 - 10:47
          +1

          That was me!

          The lowest I got Bitcoin during this dip was $33300 USD. I cannot believe some weak hand sold it to me for that low. I also got ETH for under $2000 USD, it was amazing!

          • brendanm on 08/02/2022 - 11:58

            @techlead:

            I also got ETH for under $2000 USD, it was amazing!

            That is amazing, well done.

            • techlead on 08/02/2022 - 12:05

              @brendanm: I only buy on red. I got very very excited when it went down to $33-$34k Bitcoin.

              Someone should have created an OzB entry about Bitcoin being on sale haha. The sale is over now lol, but still a good long term buy,

  • rektrading on 08/02/2022 - 10:30
    +3

    Afterpay for real estate.

    People will get rekt, badly.

    • techlead on 08/02/2022 - 10:41
      +2

      Its such a bad deal. If people can just do some simple maths, they can see it.

      • rektrading on 08/02/2022 - 10:46
        +1

        The buyers lose everything when the company go broke.

        The founders get paid. The workers get paid. The creditors get paid.

        Didn't people learn anything from the GFC?

        • holdenmg on 08/02/2022 - 11:33
          +2

          I dunno about Geelong Football Club. lol

          Anyway, https://www.rba.gov.au/education/resources/explainers/the-gl…
          shows us that the GFC were around 2007 onwards.

          In 2022, people at 18 can borrow (or apply) and that mean a whole batch of new risk takers.

          • techlead on 08/02/2022 - 11:42
            +1

            @holdenmg: Hahaha.

            The property market is a house of cards built on debt. Wages have barely moved, all this price apprieciation is all due to debt, its not sustainable.

  • Typical16-bitEnjoyer on 08/02/2022 - 11:01
    +4

    Practically a scam.

    These types of grifters want people to default. They make their money that way.

  • brendanm on 08/02/2022 - 11:57
    +3

    Rent to own is, 99% of the time, a scam that shafts the person doing the renting. The repayments are high, the equity built is low, the agreed to price for the house is high, equity is lost if you can't make payments/can't get finance at the end (made more difficult by the inflated price).

    No thanks.

    • techlead on 08/02/2022 - 13:26

      The best strategy is rent and invest (not in property)

  • bobbified on 08/02/2022 - 14:58

    Wonder how it works with the first home owner or brand new home grants since I would assume that if this company buy's the property first, it's no longer considered brand new (and you're not the first owner anymore) so the grant doesn't apply anymore.

  • toomuchdogfur on 08/02/2022 - 15:04
    +2

    The numbers don't look too awful…

    $1m Property Rent To Own Mortgage
    Start Up Fee $15,000 $0
    Deposit $10,000 $100,000
    Conveyancing $0 $2,000
    LMI $0 $23,000
    Mortgage Fee 5y $0 $1,500
    Property Tax 5y (NSW) $0 $17,000
    Strata 5y $0 $10,000
    Repayments 5y (2.44%) $352,500 $211,680
    Total Cost 5y $377,500 $365,180

    …until you look into the equity of the situation.

    $1m Property Rent to Own Mortgage
    Equity $125,000 $208,250
    Total Expenses 5y $252,500 $156,930

    So over 5 years, you'll be $95k behind. If you were rich enough to be able to pay $6k a month in rent, you'd be able to save the $100k deposit in 3 years (assuming you rent a place for $600pw = $31,200/y, leaving ~$40k to save) to get a regular mortgage and avoid the massive expenses involved here.

    This scheme is 100% aimed at the rich but financially illiterate, or those with serious FOMO.

    Note I had to make a few assumptions so those are rough numbers above, for instance:

    • ownhome says you need to pay 1% "equity" as a deposit but doesn't specify whether that equity is included in the "12.5%" figure you have after 5y… so I assumed it is.
    • I assumed that they are opting for Property Tax instead of Stamp Duty. If using Stamp Duty, add $20k to the Mortgage column (you would break even after 15y total, but that's out of scope for this calculation)
    • I didn't include property price growth because I can't predict that…
    • SlartiBartFozz on 09/02/2022 - 10:34

      So you have to pay $70,500/pa for a very basic, ordinary home (in an average metropolitan area) ?

      You would need a minimum income of AU$93,100 (marginal tax rate of 32.5%) to pay this; then assuming you or your partner earns enough over this amount to pay for all your other living expenses. Most Australians could never earn that, based on median incomes.

      If only financial literacy was a core, continious part of education, then more people (myself included) would have learned to save a deposit from early in their career — the fact that millions of Aussies haven't the ability to save that deposit in the first place, and even by the time they have the market is now further out of reach, highlighting a rampant cost of living issue, andn driven to a large degree by (modest) national population growth. Real Estate prices are unsustainable, but the ever-promised bubble will burst only after Hell freezes over.

  • foxmulder on 10/02/2022 - 08:48

    After 5 years, buyers have equity of $125k but then to change ownership they still have to pay stamp duty which is around $30k+ plus LMI around $10k+ - these 2 costs comes down around $600+ a week - hopefully they're aware that these costs are quiet significant.

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