Please note that you are using an outdated version of Internet Explorer which is not compatible with some elements of the site. We strongly urge you to update to a newer version for optimal browsing experience.

Rent-to-own property - how does it work?

31 Aug 2016

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. In these situations, creative solutions like rent-to-own become an attractive option.

With rent-to-own, Fourie says 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.

“The concept of rent-to-own isn’t a new one, but a lot of people don’t realise that it’s even an option for property,” says Barry Fourie, Western Cape Regional Sales Manager for the Rawson Property Group.

“It can be risky for both parties, so it’s important to fully understand what you’re getting into before agreeing to anything, but there are situations in which it can be a viable solution.”

Fourie says the main attraction of rent-to-own is the fact that it eliminates the need for a large cash payment upfront.

“These days, 100% home loans are rare, and most prospective buyers will need to budget for a deposit, as well as the normal transfer, bond and attorney fees,” he says.

“These upfront costs can be significant - as much as R150 000 for a R1 million property - and if the buyer doesn’t have the cash on hand, the purchase simply can’t go ahead.”

With rent-to-own, however, Fourie says 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.

“The 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,” says Fourie.

“The 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.”

He says 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.”

Fourie stresses the importance of ensuring that all these kinds of details are properly recorded on the rent-to-own agreement, as well as on the property’s title deed where appropriate.

This includes the tenant’s 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 - or declines - the sale.

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. In these situations, creative solutions like rent-to-own become an attractive option.

“Without these stipulations in place, there’s 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,” says Fourie.

“Likewise, the owner should be protected against dishonest or unreliable purchasers who don’t hold up their own end of the bargain.”

Rent-to-own can also be structured as a type of instalment sale, with an instalment agreement and a separate lease agreement running concurrently.

“The buyer could rent the property for a period, at an agreed rate, while paying off the purchase price in separate instalments,” says Fourie.

“The 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 getting legal counsel from a conveyancing specialist before entering into an instalment sale.”

Ironically, in the case of sectional title rentals, rent-to-own can be an automatic and unintentional bonus for normal tenants.

“If the owner of a block of flats, for example, decides to sectionalise the building, he or she is required to offer first right of refusal to the tenants that currently occupy the units for a period of 90 days,” says Fourie.

“It’s only if those tenants refuse the purchase, or the 90-day period lapses, that the owner can put the units on the public market.”

While those tenants would still be required to make the purchase through conventional finance channels - including coming up with the money for deposits and fees - first right of refusal and the opportunity to live in a property before deciding whether it’s worth buying are key benefits of rent-to-own purchases.

“The benefits of rent-to-own can be great, particularly if it’s the only option available to you - but that doesn’t mean it’s always a good idea,” says Fourie.

“Both buyers and sellers are advised to look over the financial implications very carefully and consult a qualified real estate agent and specialist legal professional to ensure they are fully informed and their rights are protected.”

For more information, visit the website.

Print Print
Top Articles
For wealthy South Africans an investment from $500k is often less than the cost of a second property, and with this minimum amount set to rise, the rush is on...

Those hoping to sell in the current market should be patient, but pricing your property right and working with a good agent can speed things up. Here's what to expect...

With rentals so high in Cape Town’s prime coastal strip, buying property often makes more financial sense than renting, with good buy-to-let opportunities for investors...

Loading

Your browser is out of date!

It looks like you are using an outdated version of Internet Explorer.

If you are using Internet Explorer 8 or higher, please verify that your Internet Explorer compatibility view settings are not enabled.

For the best browsing experience, update to the latest Version of Internet Explorer or try out Google Chrome or Mozilla Firefox.


Please contact our Property24 Support Team for further assistance. Tel. +27 (0)861 111 724