Rent/help to buy homes business?

[Frimley111R]

Watched a guy on YT doing the 'no money down to buy a property' vid. I didn't get it completely.

He seemed to be getting people into properties that he would rent out to them with small deposits (2-6k) and they had an option to buy longer term. This was good for them as they didn't need huge deposits to buy. And then he went to sellers of homes and flats and asked them if they'd be ok renting their properties out for a short while first (that were up for sale). Oddly a few said yes (quite a few actually) and a developer had 13 flats which they were fine to do this with.

He also mentioned commercial rents/lets which I guess was his company doing this.

But, as i said, I am not sure I understand how it works financially....

Not the same thing, but I do remember a mortgage specialist telling me how a guy approached a developed and said 'If one flat is 400k. how much for 2?' The developer says '700k'. The guy then says 'How much for 20?'. The aim being that he'd buy for a such a good bulk price that the equity in the homes based on normal prices covered his deposit and all he then needed to do (I say 'all'...) was find people to rent them out.

Always made me wonder if this possible and how easy potentially it really is. Anyway, back to my question...

Edited by Frimley111R on Monday 23 November 08:17

[MadProfessor]

There are now "official" Rent to Buy schemes offered by social landlords and housebuilders, which are also usually an extension of existing schemes like Shared Ownership. Before they got into this market, this was a technique proposed and allegedly used by some property investors. I have no idea the extent to which this is either used or has been successful in practice in the private market.

However, All Rent to Buy schemes operate on the same basic principle of spread.

In the private market, a property investor must secure a property at significantly below market value. This usually involves finding a distressed seller such as one in mortgage arrears who may be facing repossession. They need to be motivated to sell below market value and to accept the unusual terms that the property investor offers. The investor then offers an option agreement which allows them to take control of the property without ever actually owning it, therefore no deposit or other costs involved besides the legal.

There are then 2 or 3 potential exits from this:
1. Offer incentives to attract first time buyer who may not have enough deposit such as deposit schemes and stamp duty paid. Lenders are getting wary of these.
2. Improve/renovate and flip if it's something about the property that has prevented a sale at market value
3. Rent to Buy

The investor takes a deposit from the new renter/owner that's typically more than a rental deposit but less than a purchase deposit. Takes payments over a pre-defined period until the exit is agreed at the original market price. This means that the potential purchaser has saved any (potential) increase in the property price since they moved in and has a period of a couple of years to build up the necessary deposit. In terms of the payment these could be done at above market rent and some of it saved by the investor on behalf of the tenant, or at below market rent to encourage them to save for their deposit.

In the case of the distressed seller the investor may need to pay the deposit onto the original mortgage lender to repay any arrears, and to prevent foreclosure. Investor keeps the spread between the mortgage rate and rent or splits with the owner as an extra incentive.

The real money is made on the final sale as the spread. It's complicated but I suppose the attraction is that it would enable an investor to invest with no money and little risk.

The same principle holds in the social sector but the spread comes from the build cost versus "market" value of the new build. This may, or may not be, inflated. Exits can be supported by shared ownership plans with the deposit coming from a combination of returning the original rental deposit and charging 20-25% below market rents for pre-defined period e.g. 2 years.