Weighing up rent to buy

Jul 19, 2018 | Advice

“There are various ways a rent-to-buy option can be structured and equally as many ways that these deals can go awry.”

Rent-to-buy gives cash-strapped homebuyers the option to own a property in the area of their choice however make sure they read the fine print carefully warn property experts. It is also an option for sellers whose properties have been on the market for a while.

Rent to buy or own is where the tenant signs a rental agreement or lease that has the option to buy the property later, usually within three years. Every month, with the usual monthly rental payments, an additional amount is paid that accrues towards a down payment for the home. The lease will specify the amounts to be paid and the purchase price of the house.

The option of rent to buy has been around for some time and buyers can even apply for financial packages put together expressly for this option. Considering the continued slackness of the property market in general, a direct consequence of a lagging economy, we asked a few property experts for their opinion on the option of rent to buy.

The first point some made was that this is a great time for people to invest in property.

Herschell Jawitz, CEO of Jawitz Properties, says despite waning consumer confidence and a slow economy, the current residential market offers buyers an outstanding opportunity to get into the residential market. Richard Gray, Harcourts CEO, says it definitely is a great time for first-time buyers to invest in property. “With property prices coming down over the past few months there is a lot of value purchases available. However, I think that this market is an opportunity for all potential buyers,” says Gray.

Positives for property buyers include that sellers in many cases have been asked to drop their prices, a step they are more willing to take with the latest FNB surveys indicating that properties on average are taking longer to sell, up from 14 weeks and 1 day in the first quarter of the year to 16 weeks and 4 days in the second quarter. Furthermore, the banks appear to be more lenient towards approving home loans. Rudi Botha, CEO of BetterBond, SA’s biggest bond originator, says they have seen the average size of the approved bonds for the lower income groups increase by 11% over the past 12 months, compared to a 10% increase in the average purchase price.

“Further evidence of this is the fact that BetterBond has been able to secure approvals for more than 80% of applications submitted over the past 12 months, compared to 76% in the previous 12 months. In addition, the number of loans granted for 100% of the property purchase price – most of which go to borrowers earning less than R15 000 a month and buying “affordable” homes – has increased by 8% in the past 12 months,” says Botha.

However, despite these favourable conditions, the fact remains that South African households are also coping with rising fuel prices and increased cost of living. Jawitz says the challenge for many buyers, especially first-time buyers, is both affordability and the ability to come up with the deposit and transfer costs. One option that makes buying more affordable is thus the rent-to-buy option.

How does it work?

Jawitz explains the tenant will agree a rental with the owner to rent the property for a period of time and then have an option to buy the property at an agreed-upon price. The advantage of this option for the purchaser is that they get to ‘try’ out the property before deciding to buy it and know that the purchase price has been fixed.

He adds that an additional advantage is that if property prices are increasing, then the purchaser may benefit from purchasing the property at the agreed price when the value has already increased. This may also assist the purchaser to get a home loan as there is more equity in the property and a lower loan to value is required from the bank. Renting a property also requires a smaller upfront deposit payment which means the purchaser can use the rental period to save the money needed for the buying deposit and costs.

Jawitz continues that in certain circumstances, the seller may agree to have some of the rent go towards the purchase price. He warns however that sellers may require a purchaser to pay an ‘option’ fee to have an option-to-buy, which the purchaser will lose if they decide not to buy the property. Also, most sellers don’t have the ability to wait for an extended period for the purchase price to be paid to them and so finding sellers who will consider a rent-to-buy option is always going to be a challenge.

Amanda Cuba, director and COO of RE/MAX of Southern Africa, warns first-time buyers to be most careful before they sign a rent to buy deal. “The main benefit of the rent-to-buy option is that tenants are allowed the opportunity to experience living in the home before making the long-term commitment of purchasing it. These sorts of deals are seemingly less binding than a standard offer to purchase, but I would advise first-time-buyers not to be misled by the nature of the agreement and to be incredibly certain about a property and their finances before entering into the contract,” she says.

Cuba explains that usually, a rent-to-buy agreement is set up with an additional monthly fee that the seller keeps as assurance that the buyer will purchase after the lease term is over, which can then be used towards the deposit. However, if the buyer chooses not to purchase, or fails to obtain the necessary finances to purchase, this money will be forever lost to them.

“There are various ways a rent-to-buy option can be structured and equally as many ways that these deals can go awry. To ensure that both parties are covered against every eventuality, it is advisable to make use of a reputable agent who has experience setting up these kinds of purchase agreements,” says Cuba.

Related topics: Responsibility for maintenance in rental properties; Lessons learnt from Cape rental market

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