Developers are coming up with novel ways of shifting unsold units, writes FIONA REDDAN

AS THE recession continues to bite, property developers are coming up with more novel ways of shifting unsold units.

Last year a number of developers offered to provide interest-free loans on a portion of the purchase price at schemes including Elm Park and the Grange in Dublin.

Now house-builders are operating “rent-to-buy” schemes, whereby a person can rent a property for an agreed period of time, typically two to three years, use the rent to build up a deposit, and at the end of the tenancy arrangement buy the property – if they so wish – at an agreed price.

Such schemes are available all over the State. In Limerick the Roche Group has a range of developments available, including its Cois Timpeall development in Newcastle West, while Rent2Buy, which negotiates with developers and owners on behalf of the purchaser, has a range of properties available, including two-bed apartments at Maryborough Hill in Douglas, Cork, for €275,000, and a three-bed semi-detached in Listowel, Co Kerry, for €200,000.

In Dublin the Northern Cross development on the Malahide Road has 15 units available priced from €195,000 for one-beds and €235,000 for two-beds. Already 20 properties have been sold under the scheme.

Another deferred purchase option available is the Easisteps scheme, which is available at five developments around the country, including Belarmine in Stepaside, where one, two and three-bedroom apartments are priced from €195,000, and Rathborne Village, Ashtown, Dublin 15, where two and three-bed apartments start at €250,000.

For people who are sick of renting and would like to get their foot on the property ladder but are too scared to do so in the current environment, such schemes have enabled them to postpone the purchase decision while still keeping it firmly on the table.

They are also an attractive option for those who fear unemployment and declining incomes, or are finding it difficult to get a mortgage.

But how do such schemes work in practice, and are there any possible downsides?

At first glance the schemes look like a good idea. Instead of throwing “dead money” at your rent every month, you can use it to build up a significant deposit instead.

For example, rental rates at Northern Cross in north Dublin start at €950 a month for a one-bed apartment, and €1,050 for a two-bed. Over the two years the scheme runs, this would lead to a lump-sum payment of about €25,000, which, if you decide to buy, could be used as either a deposit or an additional contribution to help pay down the mortgage.

Having such a sum saved should also help you either get a mortgage or get better terms on your mortgage as you may have a lower loan-to-value (LTV) than you would otherwise.

Under the Easisteps scheme the proposed house-buyer signs a contract for purchase upfront, which is subject to mortgage approval and which includes the terms of occupancy together with a schedule of the payments required to build up the deposit. Once the last instalment towards the deposit is made, the purchaser can complete the purchase.

For example, if you would like to purchase a house valued at €250,000, but are unable to raise a mortgage at present, you can put a €5,000 down-payment on a house under the scheme, do your snag, and move in straight away.

Within two years you will have to have a deposit of about €25,000 saved (depending on the terms of the mortgage you get) to complete the purchase, which means that you will need to make an instalment of €833.33 every month towards your deposit. This payment is made in lieu of rent.

Moreover, by signing up to such schemes you will also have a number of years to “test” out the property and its location, rather than rushing into an impromptu decision. And at the end of the agreed period you don’t have to purchase if you don’t want to.

If you are no longer in a position to do so, or just are unhappy with the property and its location, or indeed the price, depending on the terms of your contract, you may be able to simply walk away.

Of course, it is also possible that by the end of the period property prices may have risen again. If so, the developer is obliged to sell to you at the price agreed at the beginning of the arrangement.

For developers, while they won’t get to off-load the property straight away, the advantages of such schemes include the fact that the property won’t lie vacant and the monthly rent coming in will help to boost their cashflow. And ultimately, of course, it may lead to a sale.

However, while there are advantages to such initiatives, due consideration should be given to all aspects of the deal.

Like all property purchases, your decision should be based on the fundamentals of the property, and not on any incentives you may be given.

Remember, if a developer has to offer an incentive to sell a property it may well be the case that the property is simply over-priced to begin with.

The first question you should ask is whether the price you will have to pay at the end of the agreed period is fair. As you will be paying today’s price in a couple of years’ time this may well not be the case. Although property prices have already fallen significantly since the peak in 2007, the uncertain economic outlook, combined with rising unemployment and the fact that there is a glut of unsold properties in spots across Ireland, particularly in the commuter belt surrounding Dublin, may mean that prices still have some way to fall.

If this were to happen all the benefits you would incur from being able to use your rent to pay down your mortgage or raise a deposit might be wiped out if you went ahead with the purchase at that level.

The second question is whether the rent in the rent-to-buy schemes is being charged at a fair market value.

As previously mentioned, two-bed apartments at the Northern Cross development will cost €1,050 a month under the rent-to-buy scheme. However, according to myhome.ie two-bed properties are available to rent in that development from about €900 a month, so you could be spending an extra €150 a month, or €1,800 a year on rent, than is necessary – money that you could have been using to save for a deposit which could then be used to purchase any property in the open market.

Moreover, rents are on a downward trajectory, so could fall further during the tenancy arrangement.

Another problem with such schemes is the “opportunity cost” of signing up to a rental agreement when you are actually in the market to buy. If you half-heartedly commit to rent a property you’re not sure about you may be missing a good opportunity to buy the one you really want – and who knows, prices may actually have risen again in three years!

In addition, as the deferred purchase option is only available on certain properties, it limits your choice, which means that you may end up with a property which isn’t one of your first preferences.

And if you don’t go ahead with the purchase your initial deposit and any credit built-up will be forfeited. This includes the initial deposit charged, which, under the Rent2Buy scheme, for example, is €2,995. Moreover, those interested will need to check how much of the rent will actually go towards the purchase price.

A further point to note is that because in some of the schemes payments made are towards a deposit and not rent, they are not eligible for either rent or mortgage relief.