Is the Rent-To-Own Option For You?

The information in this article is courtesy of iAfrica (Pitfalls of Rent-to-Own – 28 April 2009).

Since banks are insisting on exceedingly large deposit before granting home loans, the rent-to-own option has become a popular choice among home buyers.

In a nutshell, rent-to-own or lease-to-own is a term relating to a real estate agreement, which is composed of a rental lease, and a purchase agreement where the tenant has the option to purchase the property at a fixed price at a specified point of time in the future. The main idea of a rent-to-own agreement is for the buyer/tenant to rent and maintain the property for a set period of time before she or he must obtain a home loan and exercise an option to purchase — or decide to walk away from the deal.

Dr Willie Marais, national president of the Institute of Estate Agency (IEASA), believe that both the tenant/buyer and the landlord/seller win in such an agreement.

For sellers, the agreement means that they have the opportunity to tap into a broader market of potential buyers, not just those with good credit and cash for a deposit. Also, the rental income will cover existing mortgage and an opportunity to lock in the property price that might fall in a down market.

One of the main advantages for the seller is probably the fact that tenants will have an interest in maintaining the property, as it will soon be theirs.

Potential buyers will have the advantage of moving into a home that they want without handing in a large amount of cash.

A rent-to-own transaction has 3 agreements: an Option to Purchase, a Lease Agreement and a Sales Agreement. The landlord/seller will usually charge an option fee equal to 1% to 3% of the purchase price, which can then be paid off by the tenant/buyer as part of the rent. This will then act as most of the deposit on the property at the end of the rental period.

Marais warned potential rent-to-own buyers that they should consult an experienced estate agent, a reputable mortgage originator and the advice of an attorney should they decide to enter such an agreement. The following questions should be answered before signing the agreement:

Is the price fair given future price expectations?
What portion of the rent will be credited towards the purchase price?
Who will be responsible for rates/taxes during lease period?
Under what conditions could the rent-to-own contract be voided?
Under what conditions will the buyer be refunded any part of the option fee?

Marais also proposed that all buyers that are considering renting-to-own should first consider renting cheaply while saving for a deposit, as this might be a better option in some cases.

Buy Durbanville property