Buy Now Pay Later is coming to residential real estate

Buy now pay later is a pandemic success story. It works well across numerous price ranges but what about real estate?

Rent-to-buy has been around in real estate for decades but with a chequered history of unscrupulous sellers exploiting the excitement of naive buyers who – absent a decent deposit – saw it as a foot on the rung of the real estate ladder.

Typically the buyer – having made valuable permanent improvements to the property – falls into arrears on the rent/buy instalments and is forced out.

Sellers often pocketed outsized rent for the duration of the tenant’s occupation and got to keep the tenant’s improvements as their own. The exit of one sucker made way for the next one and so the scam rolled on.

Rent-to-buy has now met big money and is going straight.

The money men want returns without the controversy and as housing affordability continues to be a pressing issue, the time for the concept to take off may have arrived.

Paying for real estate by BNPL means paying a rent component as well as a buy component in each instalment. Bearing the weight of the rent component is the price users must pay for not having sufficient funds to acquire the property by traditional means.

OwnHome is a recent start-up in the Australian rent-to-buy space.

It allows instant occupation of its customer’s chosen home that it buys in its name. The customer can have the home transferred to them by applying the deposit the owners have ‘saved’ in the form of the buy components paid in each paid instalment and paying the balance of the “pre-agreed price” to the company.

This model rewards the BNPL company with a return on funds it has invested paid for by the customer.

One can imagine a BNPL player also wishing – in the real estate context – to secure remuneration from the seller and possibly the real estate agent, for being able to provide the means by which to close the sale.

There are however a number of legal issues that need to be overcome.

By paying a buy component in monthly instalments, the customer would ordinarily gain a beneficial interest in the property which the BNPL company may see as an impediment to enforcement in the event of default.

Likewise, allowing the customer to conduct improvements e.g. renovations would also bestow upon them a beneficial interest.

How those interests need to be accounted for if the property is required to be sold to a third party is a potential accounting and legal headache.

There are also instalment contract rules which have a similar effect and can operate to transfer of the property in certain circumstances.

Another company, Bricklet, allows investors to become “an independent part owner” of their chosen residential or commercial dwelling via BNPL.

Under this model a customer can buy 1% of a “fragmented” million-dollar property for $10,000. Bricklet will assist with arranging finance for the majority of the purchase price with the buyer obliged to pay interest by instalments.

Owners are able to buy and sell their “bricklets” at any time through the company’s dedicated listings market for fragmented properties. Capital gains on a particular property are shared pro rata between all bricklet owners.

“If it gets to the point where the owner can’t continue they just need to sell their bricklet. It is no different to discharging a mortgage, the person keeps whatever percentage is theirs”.