In certain market conditions, when banks are tight on credit, the knock-on effect this has on property affordability can see many buyers unable to purchase a home in the traditional way.<\/p>\n
In these situations, creative solutions like rent-to-own become an attractive option, according to Rawson Property Group.<\/p>\n
\u201cThe concept of rent-to-own isn\u2019t a new one,\u201d said Barry Fourie of Rawson group, \u201cbut a lot of people don\u2019t realise that it\u2019s even an option for property. It can be risky for both parties, so it\u2019s important to fully understand what you\u2019re getting into before agreeing to anything, but there are situations in which it can be a viable solution.\u201d<\/p>\n
The main attraction of rent-to-own is the fact that it eliminates the need for a large cash payment upfront.<\/p>\n
\u201cThese days, 100% home loans are rare,\u201d said Fourie, \u201cand most prospective buyers will need to budget for a deposit as well as the normal transfer, bond and attorney fees. These upfront costs can be significant \u2013 as much as R150 000 on a R1million property \u2013 and if the buyer doesn\u2019t have the cash on hand, the purchase simply can\u2019t go ahead.\u201d<\/p>\n
With rent-to-own, however, the costs are spread over a much longer period of time, making the purchase more viable for a financially stable person with limited access to immediately available capital.<\/p>\n
\u201cThe way it normally works is the buyer and seller will sign a lease agreement that allows the buyer to live in the home, like a typical tenant, but with the intention of purchasing the property at the end of the lease,\u201d said Fourie. \u201cThe details vary, but generally, in return for first right of refusal, an additional sum is added to the monthly rental and acts as a down-payment or a deposit towards the future purchase. This sum is often forfeited if the tenant decides not to buy the property when the lease ends, but, depending on the agreement, can count towards the purchase price if the sale goes ahead.\u201d<\/p>\n
Fourie stressed the importance of ensuring all these kinds of details are properly recorded on the rent-to-own agreement, as well as on the property\u2019s title deed where appropriate. This includes the tenant\u2019s pre-emptive right (or right of first refusal), the agreed sales price of the property, and the method with which any down payments or deposits will be handled in the event that the tenant accepts \u2013 or declines \u2013 the sale.<\/p>\n
\u201cWithout these stipulations in place, there\u2019s nothing to stop an unscrupulous owner from selling the property to someone else without first offering it to the tenant, or raising the sales price so much that the tenant no longer believes the purchase is a good investment,\u201d said Fourie. \u201cLikewise, the owner should be protected against dishonest or unreliable purchasers who don\u2019t hold up their own end of the bargain.\u201d<\/p>\n
Rent-to-own can also be structured as a type of instalment sale, with an instalment agreement and a separate lease agreement running concurrently.<\/p>\n
\u201cThe buyer could rent the property for a period, at an agreed rate, while paying off the purchase price in separate instalments,\u201d said Fourie. \u201cThe laws governing this kind of arrangement are quite complicated, however, and there are very specific obligations placed on both parties. Because of this, I would definitely recommend taking legal counsel from a conveyancing specialist before entering into an instalment sale.\u201d<\/p>\n
Ironically, in the case of sectional title rentals, rent-to-own can be an automatic and unintentional bonus for normal tenants.<\/p>\n
\u201cIf the owner of a block of flats, for example, decides to sectionalise the building,\u201d said Fourie, \u201che or she is required to offer first right of refusal to the tenants that currently occupy the units, for a period of ninety days. It\u2019s only if those tenants refuse the purchase, or the ninety-day period lapses, that the owner can put the units on the public market.\u201d<\/p>\n
While those tenants would still be required to make the purchase through conventional finance channels \u2013 including coming up with the money for deposits and fees \u2013 first right of refusal and the opportunity to live in a property before deciding whether it\u2019s worth buying are key benefits of rent-to-own purchases.<\/p>\n
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