Prospec­tive buy­ers can sign agree­ments to be ten­ants be­fore they own the home they’re rent­ing

Weekend Argus (Saturday Edition) - - PROPERTY - BONNY FOURIE

RENT-TO-OWN trans­ac­tions may slowly reap­pear on the South African property scene as prospec­tive buy­ers look for cre­ative ways to get a foot on the property ladder in a de­clin­ing econ­omy.

Such trans­ac­tions are com­mon when buy­ing large house­hold ap­pli­ances and pricier ev­ery­day items, but not many peo­ple know they can also ap­ply when buy­ing a home.

How­ever, this is chang­ing, say le­gal and property pro­fes­sion­als.

“There has been not only an in­crease in in­quiries about how to con­fig­ure rent-to-own trans­ac­tions, but also a sud­den in­crease in ten­ants ter­mi­nat­ing their leases in favour of pur­chas­ing prop­er­ties out­right from their land­lords, par­tic­u­larly in the last month or so,” says Denoon H Samp­son of con­veyanc­ing at­tor­neys Denoon Samp­son Ndlovu Inc.

“The main ben­e­fit of rent-toown is the ten­ant is able to peg the price at to­day’s val­ues and de­fer the trans­fer un­til he has raised the price,” he says.

“Al­ter­na­tively, he still has the choice not to buy the property,” Samp­son says, ad­ding most of the prop­er­ties con­cerned are sec­tional ti­tle and priced be­low R2 mil­lion.

It is dur­ing cer­tain market con­di­tions, such as those being ex­pe­ri­enced in South Africa and when banks are tight on credit, buy­ers are un­able to buy homes in the tra­di­tional way and, there­fore, look for cre­ative so­lu­tions like rent-toown, says Rawson Property Group chair­per­son Bill Rawson.

“The con­cept of rent-to-own isn’t new, but many don’t re­alise it’s an op­tion for property.”

Those who are con­sid­er­ing it must fully un­der­stand what they are get­ting into be­fore agree­ing to any­thing, he warns.

“It can be risky for both par­ties, but there are sit­u­a­tions in which it can be a vi­able solution.”

Rawson says the main at­trac­tion of a rent-to-own pur­chase agree­ment is it elim­i­nates the need for a large cash pay­ment up­front.

This is help­ful con­sid­er­ing 100% home loans are rare these days and most prospec­tive buy­ers will need to budget for a de­posit and the usual trans­fer, bond and at­tor­ney fees.

“These up­front costs can be sig­nif­i­cant – as much as R150 000 for a R1m property. If the buyer doesn’t have the cash on hand, the pur­chase can’t go ahead.”

With rent-to-own, Rawson says the costs are spread over a much longer pe­riod, mak­ing the pur­chase more vi­able for a fi­nan­cially sta­ble per­son with lim­ited ac­cess to im­me­di­ately avail­able cap­i­tal.

“The way it usu­ally works is the buyer and seller sign a lease agree­ment that allows the buyer to live in the home, like a typ­i­cal ten­ant, but with the in­ten­tion of pur­chas­ing the property at the end of the lease,” says Rawson.

“The de­tails vary, but gen­er­ally in re­turn for first right of re­fusal, an ad­di­tional sum is added to the monthly rental and acts as a down pay­ment or a de­posit to­wards the fu­ture pur­chase.”

How­ever, if the ten­ant de­cides not to buy the property when the lease ends, this sum is of­ten for­feited.

Depend­ing on the agree­ment, if the ten­ant does buy, that sum can count to­wards the pur­chase price.

Ma­jor rental agencies say the rent-to-buy method of pur­chas­ing property is un­pop­u­lar, but ac­cord­ing to real es­tate at­tor­neys from Cliffe Dekker Hofmeyr (CDH), this could be be­cause the con­cept is not being mar­keted or there is in­suf­fi­cient knowl­edge about this op­tion in the res­i­den­tial market.

“We be­lieve there is a need for rent-to-own agree­ments, es­pe­cially in the cur­rent market,” say CDH di­rec­tor Lu­cia Eras­mus, as­so­ci­ate Joloudi Baden­horst and can­di­date at­tor­ney Emilia Pablian.

“These meth­ods may be utilised by low-in­come earn­ers or first-time buy­ers un­able to ob­tain loans to fi­nance the pur­chases of prop­er­ties, or who have not ac­cu­mu­lated enough cap­i­tal to pay de­posits for such pur­chases.”

Although the preva­lence of rent-to-own agree­ments can­not be at­trib­uted to par­tic­u­lar types of res­i­den­tial ar­eas, “we be­lieve these agree­ments will be­come more pop­u­lar in larger cities, where qual­i­fied stu­dents and/or young adults en­ter the em­ploy­ment market and be­gin earn­ing salaries”.

The rent-to-own con­cept is also a pop­u­lar struc­ture for self-em­ployed pur­chasers to get “a foot in the door”, as few home­buy­ers of this sta­tus are aware of all the “red­tape” they must com­ply with, says Meyer de Waal, of MDW Inc, a con­veyanc­ing at­tor­ney who has been spe­cial­is­ing in this method of buy­ing for the past 10 years.

He ex­plains any type of property is suit­able for rent-to-own type trans­ac­tions, ad­ding his firm’s largest such trans­ac­tion was a farm sale for R22m.

“Of­ten a home loan is de­clined be­cause the credit record of the buyer re­flects a mi­nor neg­a­tive en­try. If a rent-to-buy agree­ment is suc­cess­fully ne­go­ti­ated be­tween seller and buyer, then the buyer has a few months ex­tra to re­store his credit re­port and then reap­ply for a home loan.”

How­ever, Meyer warns it is rec­om­mended that buy­ers and sell­ers con­sult with at­tor­neys who un­der­stand and are fa­mil­iar with the re­quired le­gal doc­u­ments for this process.

Rent­ing and liv­ing in a home be­fore buy­ing is an op­tion for those who need time to ac­cu­mu­late funds for a de­posit, trans­fer fees and so on.

Sign­ing a rent-to-own agree­ment gives the ten­ant an op­por­tu­nity to buy the property they rent at a later stage.

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