Rent-to-buy property – your questions answered

Rent-to-buy property – your questions answered

31 Jul 2020

What is 'rent to buy' property?

Also known as 'rent to own' property, this is a type of lease agreement that lets a tenant rent for an agreed period of time, before getting the option of buying the place they've been living in. The 'buy' or 'sale' component of such a lease is called the Option Deed, which would describe the changing of the agreement into a bond when the lease runs out. Alternately, an Offer to Purchase (OTP), can be attached to the lease agreement when it's signed. The OTP would come into effect at the end of the lease term, subject to certain terms and conditions, such as securing a bond.

Why 'rent to buy' instead of buying?

The concept isn't new, but it's not widely known. One of its main attractions is that it eliminates the need for a large cash payment upfront. It works for people who don't qualify for a home loan - perhaps because they need time to improve their credit record or to save a deposit. It's an unconventional way of acquiring property, but it offers a way onto the property ladder, especially for young or first homebuyers.

The costs

Payments are spread out, making it more viable for a person on a limited budget. As part of a 'rent to own' agreement, you'd pay regular rental costs, plus an upfront option fee and ongoing option fees. These option fees go towards building up a deposit, which ultimately brings down the total purchase price if the sale goes ahead. However, option fees could be forfeited if the sale does not go through.

The benefits

…for tenants/buyers

  • It's an option for first homebuyers.
  • It's a possibility if you're unable to secure a home loan and buy property in the traditional way.
  • It allows time to build up good credit record.
  • It provides an opportunity to save for a deposit.
  • It lets you check out a place in detail before you buy.
  • It's an opportunity to experience the surrounding and local areas before committing.
  • It gives you the freedom to back out of the deal at any time without it negatively impacting your credit record because legally it's considered a normal rental agreement.

…for owners/sellers

  • Tenants are unlikely to move out at short notice and leave you in the lurch because they've committed to a specific kind of lease.
  • Tenants usually maintain the property well and treat it as their own because they are renting with a view to buying.

Conditions

It's essential to have an agreement in place, stipulating all the conditions agreed upon between both parties. Here are some of the most important things to include:

  • Lease term.
  • Monthly rental payments.
  • Purchase price.
  • Percentage of the purchase price to be paid as a deposit to secure the 'rent to buy' option, if applicable.
  • Confirmation of whether the prospective buyer's rental costs will or will not go towards the purchase price at the end of the lease.
  • The prospective buyer's responsibilities, e.g. paying rates and taxes or levies, which are typically taken care of by the owner.

Find out what you can afford before entering into this type of lease agreement to avoid disappointment, or forfeiting the option fees at the end of the lease term, if it turns out that you cannot afford the property.

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