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Rent-to-own Real Estate Schemes
Aug 19, 2019
Will it make tenants homeowners?
With rental expenses accounting for a significant chunk of the cost of living, Rent-to-own scheme is an ideal fit for residents and investors. Money on rent is certainly dead capital. If the rental money is paid on a mortgage you will be an owner of the house in the next few years. Purchasing real estate should always a important part of getting wealthy strategy.
How does it work?
Under rent-to-own schemes, an agreement is formed between a tenant and a buyer at the start of the lease. It essentially works like an option contract, allowing the tenant a window of time (usually two to three years) before they make a decision. If they opt to purchase, they can do so at a fixed price, and a significant percentage of the paid rent would be returned to the buyer in the form of credit towards the purchase. Should the tenant decide not to buy at the end of the lease’s term, there would be no penalty.
Going down the rent-to-own route allows the tenant the opportunity to try before they buy and the option to put their paid rent to good use. From the potential buyer’s perspective, the process can also be less complicated than applying for a traditional mortgage, as you won’t have to bear the burden of putting down a hefty down-payment. By removing this problem for the developers it is beneficial as they can sell their ready stock more easily. In a market where new units are always being released for move in, buyers can be enticed to pick up an older unit that has a rent-to-own payment scheme.
What should you be aware of?
Besides the advantages of rent-to-own schemes, there are also some extra costs and risks involved with this type of purchase. If you are renting under this type of a contract, you will have to pay a premium in order to have the option to do so. But if you decide not buy, you will have to forgot the extra money paid towards the higher rent. Then, there’s also the risk of not qualifying for a home loan or not getting approval on time. And, what if you violated one or more terms listed in your tenancy contract unknowingly, which would deny you the right to buy the property?
There are other questions to consider as well. What happens if the market experiences a downward shift during the rental period? What if the tenants’ financial situation changes and they can no longer afford the property? Is it possible to sell the real estate while it is being occupied on a rent-to-own basis? Further regulation is required to manage these risks and ensure minimal fallout from an unexpected end to a rent-to-own contract.
Important clauses to be noted before signing the contract are:
- Real Estate value: Make sure the house value is the amount you have agreed to.
- Years: Check the number of years on the contract
- Down payment: Make sure you check that your total rent amount would be deducted from the purchase value or only a certain percent of it would be considered.
- Refundable or Non-refundable rent: Some sellers refund certain percent of down payment if the buyer exits the contract. Check whether the down payment is refundable or not.
- Exit terms: Check the exit terms and conditions
- Additional costs: Check if any hidden charges are added
- Job loss: Look what if you lose your current job
- Mortgage rejection: Check what if your mortgage gets rejected at the time of purchase
Anyway it’s always a wise decision to read all the fine print before entering such an agreement!
Conclusion
In recent years, we have seen greater flexibility in payment plans for off-plan projects and the introduction of new rules that make it easier for investors to buy off-plan properties, which has led to rising interest in that segment of the market. Rent-to-own schemes could provide a similar boost for ready properties and, coupled with the right kind of regulation, could prove to be a very attractive option for home buyers.
A modern development from the Dubai Land Department has made rent-to-own even more engaging:
A title deed is instantly delivered from the DLD for the property within a rent to own plan whereby purchasers have up to 20 years to pay off the ready property while the title deed is in their name. This specific title deed reads that this is a title deed registered against a payment plan.
Properties available in this scheme in several communities:
- Motor city offers townhouses and villas
- Dubailand offers villas, apartment, and townhouse
- Dubai South offers studios and apartments
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With rental expenses accounting for a significant chunk of the cost of living, Rent-to-own scheme is an ideal fit for residents and investors in Dubai. The current market conditions are conductive to drive rent-to-own initiatives as these offer customers various options to buy a house in a financially feasible manner through affordable and convenient financial plans.