By Jarrod McCabe and Jordan Telfer
With Melbourne property prices remaining subdued, the gap between rental costs and mortgage repayments has narrowed, which means first-time buyers, particularly renters, are finding homeownership more attractive and attainable.
This shift is leading to an unusual trend: renters are increasingly able to purchase their rented properties from their rental providers.
Historically, while common to express interest, such transactions rarely materialised. Now, we’re observing a shift where these intentions are frequently turning into successful property purchases.
What’s driving the trend?
This situation often arises during lease renewals, a time when renters evaluate their living arrangements and future plans.
Despite frequent discussions about purchasing rented properties during these periods, most inquiries traditionally fizzled out due to unrealistic market value perceptions or unorganised finances.
However, the current market’s unique conditions have altered this dynamic. On one hand, in a softer market, renters might test the waters to see if a financially stressed owner is open to selling.
On the other hand, in a more robust market, owners would obviously prefer to go to market to capitalise on the strong competition, which then forces renters to compete in a high-demand market – with escalating prices typically taking the property out of reach.
Shifts balancing the playing field between first-time buyers and investors
It’s clear that 2024 presents what might be described as a perfect storm, influencing both renters and investors for various reasons. The motivations for both groups are aligning, creating unique opportunities in the market.
Firstly, the dynamics between first-time buyers and investors are becoming more balanced. Traditionally, both demographics competed for similar properties – quality apartments, villa units, or small houses. This competition often prompted government interventions aimed at assisting first-time buyers, usually at the expense of investors. However, the current market conditions are fostering a more level playing field.
From an investor’s perspective, several factors are driving a reconsideration of their positions. Interest rates, for instance, have likely reached a peak, especially for those who invested in properties over the past decade.
Additionally, changes such as the increase in land tax in Victoria are starting to pinch. The ongoing amendments to the Residential Tenancies Act, which introduce more stringent maintenance and provision requirements, are also contributing to the growing financial burden – often felt as “death by 1000 cuts” by our clients.
Many investors, particularly baby boomers who have held properties for 15 to 25 years, find that these assets have served their purpose. After experiencing significant growth, these property owners are reaching a stage in life where managing investments becomes less appealing, making it an opportune time to sell.
On the flip side, renters face their own set of pressures that make purchasing more appealing. If a property they reside in is going to be sold, the possibility of having to vacate and find new accommodation in a tight rental market becomes a strong motivator. With vacancy rates at record lows and the cost difference between renting and owning narrowing, the financial rationale for buying grows stronger. For many renters, the thought of paying off their own mortgage rather than someone else’s becomes a compelling argument for purchasing.
Additionally, cultural shifts in property ownership priorities, especially among younger generations, influence market dynamics. For example, Gen Z places a high value on property ownership, contrasting with the Millennial tendency to prioritise other life experiences over immediate property investment.
This generational shift means that if opportunities to purchase arise, younger renters are more likely to seize them.
Advantages for investors
As property investment advisors, our role is to ensure our clients understand all aspects of property transactions, particularly when considering direct sales to renters.
This approach can offer substantial financial benefits, though it’s important to navigate it carefully to avoid potential pitfalls.
Cost Savings in Direct Transactions: One of the most significant advantages of selling a property directly to a renter is the cost savings involved. By bypassing traditional marketing and sales campaigns, investors can avoid various expenses.
Agent Commissions: While an agent’s involvement is still crucial for navigating the legal and procedural aspects of the sale, you can save on the hefty commissions typically associated with property sales. Engaging an agent for negotiation and paperwork, rather than full-service marketing, reduces costs considerably.
Marketing Expenses: The costs of marketing a property – professional photography, online listings, print advertisements, and possibly staging the home – can be substantial. Direct negotiations eliminate these costs.
Property Presentation: When selling to a renter who has lived in the property, the need for extensive refurbishments or staging with new furniture and decor is less critical. This is especially true if the renter is familiar with and accepting of the property’s current condition.
Continuity of Rent: A crucial financial aspect often overlooked is the continuity of rental income. When a property is sold on the market, it often sits vacant during the selling period and settlement, leading to lost rental income. In direct sales, the renter continues paying rent up until the settlement, potentially covering several months.
Negotiating with renters
Professional Guidance: It’s wise to engage a real estate agent or a legal advisor to ensure that all negotiations are conducted professionally and legally. This helps maintain a clear boundary and professional relationship between the landlord and renter.
Initiating the Sale Process: When considering a sale to a tenant, the first step is to subtly indicate your intention to sell the property. This should be followed by formally issuing a notice to vacate for sale purposes, setting a clear legal and professional framework for the upcoming negotiations. It’s crucial that the tenant approaches you regarding the sale rather than you soliciting them directly. This positions you more favourably in negotiations as it suggests tenant interest is driven by their initiative, not coercion.
Evaluate Renter Interest: Assess the renter’s interest and capacity to purchase. This involves understanding their financial situation and willingness to buy at a realistic market price.
Valuation and Expectations: Understand the current market value of the property and how it compares to potential offers from the renter. Be prepared to discuss how market conditions, such as interest rate changes, could impact property value. This knowledge will help you frame your expectations realistically and provide a baseline for negotiations.
Strategic Timing and Communication: Utilise the notice period to keep the pressure on the renter. This period is critical as it focuses the renter’s mind on the urgency of the situation. Communication should be consistent and reinforce the impending sale, subtly reminding the renter of the timeline and encouraging them to make a decision.
Conducting the Negotiation Controlled Disclosure: It’s advantageous to control the flow of information. For example, when discussing potential sale prices and terms with a renter, it’s critical to withhold certain strategic information that could be used against you in negotiations. This includes detailed cost analyses and your bottom-line price.
Flexibility: Be prepared to offer some flexibility in terms of price and settlement terms. While you may not achieve the absolute top dollar, the savings on marketing, staging, and vacancies can offset a slightly lower sale price.
Risks of Premature Withdrawal: Withdrawing the notice to vacate, too early, can lead to significant complications if the deal falls through. If for any reason the renter does not fulfil their commitments or the conditions of the sale are not met, you would need to restart the vacating process. This not only delays your ability to market the property but might also push the sale into a less favourable time of year, impacting potential returns.
Maintaining Momentum: Ensure that preparations for a market sale, such as property styling and photography, or any works required, continue in the background. This not only keeps your options open but also maintains pressure on the renter to finalise the negotiation if they are genuinely interested in purchasing.
Legal and Contractual Proceedings: Once an agreement is reached in principle, move swiftly to formalise the deal through legal contracts to avoid any misunderstandings or changes in circumstances. By focusing on these strategic elements, investors can maximise the benefits of selling directly to renters while minimising risks and maintaining a steady income stream.
Take home message
Amid the shifting Melbourne rental-owner dynamic, investors should be looking out for unique opportunities to engage directly with renters, potentially streamlining transactions and maximising returns. But only if there are clear pricing advantages or greater efficiencies are on the cards, not just because it seems easy.
By evaluating each opportunity on its merits, investors can ensure that they are not just simplifying the transaction process, but are also securing tangible benefits that improve their investment outcomes – underpinning wealth creating opportunities for the future.