For those who aren’t quite financially able to buy a home, there is the Rent to Buy (R2B) alternative.
While interest rates have come down, the affordability of debt and poor credit scores are impacting many South Africans, ruining their chances of owning a home in the near future. Rentals have become popular as a result, but paying rent is often seen as a grudging payment that helps the owner pay off a home loan, leaving the renter with limited capacity to save. But what if you could rent and live in your future home while you build up your financial well-being? You can with Rent to Buy (R2B).
This is a financing solution for people looking to fulfil their home ownership dream, but who may be struggling financially and/or unable to get a home loan. Basically, you rent a property, which can be any type of property, with an option to buy it at a specified later date. You will need to sign three agreements:
A Lease
This is similar to any usual rental property lease. It means you can live on the property provided you pay the rent and abide by the conditions in the lease.Advantage:
You can live on the property, but a portion of the rent you pay is put aside and used as credit towards the purchase price.An Option to Purchase
This will be the document to “pull together” the Lease and the Sale Agreement and set out the timeline by which you must decide whether to buy the property and then “exercise the option to buy”. While you are renting, you have the chance to save towards the property deposit, pay off any debts you may have, improve your credit score, and prepare yourself for becoming a homeowner.Advantage:
At the end of the rental lease agreement, you have the choice to purchase the property or leave it. Any rental credits you have earned will be put towards the purchase price, reducing the amount of home loan you may need to apply for.A Deed of Sale Agreement
Once you have fulfilled all your obligations as outlined in the lease and Option to Purchase agreements, and the lease has come to an end and you still want to buy the home, you will apply for any further financing from a bank and use the Deed of Sale that forms part of the Rent2Buy sales pack. This means you do not have to renegotiate the terms and price of the property you want to buy.Advantage:
Your application for a home loan will be for a lower bond amount as you can subtract the deposit you saved, which will make it easier for you to qualify for a lower home loan and also lower monthly home loan repayments. If you are a first-time homebuyer who qualifies for a First Home Finance subsidy (previously known as FLISP), you can also save thousands of Rands off your purchase price.
Where to Find R2B
Most R2Bs are offered by developers, who build a complex of units or convert an old building into livable residential properties. They can also be sold by real estate agents, private sellers who are prepared to take on the risks of a R2B, and attorneys who engage in property sales.
MDW Inc is one such group. This legal firm has been presenting R2Bs to the market since 2007 and, says its director, Meyer de Waal, “has since fine-tuned our concept and assisted many aspiring homebuyers to get their foot in the door to own their own home.”
“R2B is a dream-come-true opportunity for many people who are unable to afford to buy a property because they have debt or limited financial resources,” says de Waal. “It is crucial, though, that R2B candidates put themselves in a stable financial condition, which is why our company works with debt restructuring companies that assist individuals in clearing their debt and starting from scratch again if they want to own their own homes and stop paying rent.”
Once a buyer has prequalified through a free, quick online process for a Rent2Buy transaction, they can view the R2B units on offer and select a unit to secure as a future home. The final Rent2Buy application will then be processed, and once approved, the buyer can sign the documents and move in, once a normal rental deposit is paid. A compulsory extra, offered by MDW, at R150 per month, is the engagement of a ‘My Budget Fitness Personal Trainer’, who helps prepare the buyer for their future home loan application, improve their credit score, and their affordability during the R2B term.
Not all R2B developers offer this level of service, but in theory, they should, given the increasing popularity of this type of deal. For example, in early February, MDW presented 830 affordable units across 20 secure sectional title developments across Gauteng, all of which are managed by reputable managing agents. Within a couple of weeks, the organisation was flooded with applications.
Handholding
R2B is a fabulous option for first-time homebuyers, but some may not understand all the aspects of acquiring a property. The caution is to ensure that you work with well-known developers, estate agents, and attorneys who can spend enough time to guide you through every step of the process and explain the lease-purchase agreement to you.
You should inspect the property you are keen on, as well as the estate, because you will be committing to spending a number of years there as per the rental agreement and the Offer to Purchase. Remember that you do not have to buy the property when the rental lease concludes, but this does have some financial implications, which the agent should explain carefully.
