What you need to know about renting to own property

What you need to know about renting to own property

Private Property South Africa
Private Property Reporter

Renting to own property is an alternative leasing agreement that allows renters to be able to purchase the property they’re renting when their lease expires. The rent to buy model allows people who would’ve otherwise been unable to get on the property ladder to be able to purchase property. Many people are unfamiliar with the rent to buy concept due to the fact that it isn’t commonly used as a way to become a homeowner. Despite this, renting to own property is a viable way to improve your credit history and build up the necessary funds for homeownership.

Here’s everything you need to know about the rent to buy property model:

Renting to own can help with saving up the funds needed for homeownership

Becoming a property owner comes with a lot of costs that aren’t often known about unless one is educated on the homebuying process. When purchasing a home, you need a deposit as well as money for transfer duties, transfer fees, bond registration fees, moving costs, and homeowner’s insurance, just to name a few.

There are many people who wish to own property but may not necessarily be able to afford all the upfront costs involved. The rent to own model allows people to be able to pay these costs over a long period time, giving them access to homeownership.

A rent to own lease allows the buyer to rent from the landlord with the agreement to purchase after the lease period expires. A fee is also added onto the monthly rental fee which goes towards the down payment for the property. This means that at the end of the lease, the buyer will have less money to pay towards the deposit and the purchasing price.

It can help improve credit history

Your credit history is one of the most important factors that financial institutions look at when deciding whether to grant you a home loan or not. If you have bad credit, it is almost near impossible to get a home loan from a bank. But with the rent to buy model, those with bad credit scores can slowly build them back up again and possibly have a good-enough credit score when it’s time to purchase the property and apply for a mortgage.

An additional advantage to the rent to buy model is that should you decide to halt the purchase, your credit score won’t be affected, unlike if it was a direct purchase.

It helps buyers get a feel of the property before making a permanent decision

Buying a property is a long-term decision and it can feel very permanent. Renting to own is great for those who may be unsure of whether they truly want to commit to living in a specific area, or live in a specific house. By renting to buy, you get a general feel of what it’s like to live in the property and in the area. Should you decide that it’s the wrong fit, leaving will be easy as you haven’t tied yourself to a mortgage.

Buyers can agree to purchase at the property’s current value, even if it increases

Another benefit of renting to own is that your rent to own agreement will have the home’s selling price recorded, which means that you will buy the home at that specific value, even if the value increases in the future. If the value happens to increase, you would have gotten a great bargain, whereas if it decreases in the future, the opposite is true.

The property won’t be in the buyer’s name until the transfer goes through

A significant disadvantage is that due to the nature of the rent to buy model, the buyer will not have their name on the title deed until the transfer is processed. This can present a lot of challenges and worries, as legally, the property will still be in the seller’s name.

What sellers can expect from a rent to own agreement

High-quality buyers - As a seller, you’re likely to attract high-quality buyers. Due to the fact that they’ll be investing in purchasing your property after the expiration of the lease, they’re more inclined to look after the property. They’re also likely to go through with the sale, because they’ll lose money if they decided to cancel.

You can sell your property at a slightly higher price - Due to the fact that renting to own can potentially leave sellers with less money when the property’s value increases after it was sold at a lower price, you can opt to sell your property at a higher price. This will protect you from undercutting yourself on your home’s future value. Selling at a higher price also helps when property prices are falling.

If the buyer backs out, you’ll get to keep the option fees - Should the buyer decide not to purchase the property at the end of the lease, they will forfeit the money paid towards the deposit.

It closes you off to negotiations - Unlike a regular house buying process, when you rent to own, you can’t bid buyers against each other. This means that if a new buyer is willing to purchase at a higher price, you won’t be able to do anything about it if the rent to own agreement has already been signed.

There’s a possibility that the buyer can default on payments - There’s always a slight chance that the person renting from you might not honour their part of the rent to own agreement, which can possibly put you in a financial bind.

Renting to own is an alternative way for people to purchase property. Although it may be beneficial because it assists with building a credit history and paying less fees upfront, there are also other factors that both sellers and buyers need to be aware of in order to make the best possible decisions.

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