Understanding the rent-to-own option

© Cathy Yeulet – 123RF.com

“The concept of rent-to-own isn’t a new one,” says Barry Fourie, Western Cape regional sales manager for the Rawson Property Group, “but a lot of people don’t realise that it’s even an option for property. It can be risky for both parties, so it’s important to fully understand what you’re getting into before agreeing to anything, but there are situations in which it can be a viable solution.”

The main attraction of rent-to-own is the fact that it eliminates the need for a large cash payment upfront.

“These days, 100% home loans are rare,” says Fourie, “and most prospective buyers will need to budget for a deposit as well as the normal transfer, bond and attorney fees. These upfront costs can be significant – as much as R150,000 on a R1m property – and if the buyer doesn’t have the cash on hand, the purchase simply can’t go ahead.”

More viable for a financially stable person

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

“The way it normally works is the buyer and seller will 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 Fourie. “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. This sum is often forfeited if the tenant decides not to buy the property when the lease ends, but, depending on the agreement, can count towards the purchase price if the sale goes ahead.”

Fourie stresses the importance of ensuring all these kinds of details are properly recorded on the rent-to-own agreement, as well as on the property’s title deed where appropriate. This includes the tenant’s pre-emptive right (or right of first refusal), the agreed sales price of the property, and the method with which any down payments or deposits will be handled in the event that the tenant accepts – or declines – the sale.

“Without these stipulations in place, there’s nothing to stop an unscrupulous owner from selling the property to someone else without first offering it to the tenant, or raising the sales price so much that the tenant no longer believes the purchase is a good investment,” says Fourie. “Likewise, the owner should be protected against dishonest or unreliable purchasers who don’t hold up their own end of the bargain.”

Rent-to-own can also be structured as a type of instalment sale, with an instalment agreement and a separate lease agreement running concurrently.

“The buyer could rent the property for a period, at an agreed rate, while paying off the purchase price in separate instalments,” says Fourie. “The laws governing this kind of arrangement are quite complicated, however, and there are very specific obligations placed on both parties. Because of this, I would definitely recommend taking legal counsel from a conveyancing specialist before entering into an instalment sale.”

Sectional title rentals

Ironically, in the case of sectional title rentals, rent-to-own can be an automatic and unintentional bonus for normal tenants.

“If the owner of a block of flats, for example, decides to sectionalise the building,” says Fourie, “he or she is required to offer first right of refusal to the tenants that currently occupy the units, for a period of ninety days. It’s only if those tenants refuse the purchase, or the ninety-day period lapses, that the owner can put the units on the public market.”

While those tenants would still be required to make the purchase through conventional finance channels – including coming up with the money for deposits and fees – first right of refusal and the opportunity to live in a property before deciding whether it’s worth buying are key benefits of rent-to-own purchases.

“The benefits of rent-to-own can be great,” says Fourie, “particularly if it’s the only option available to you – but that doesn’t mean it’s always a good idea. Both buyers and sellers are advised to look over the financial implications very carefully, and consult a qualified real estate agent and specialist legal professional to ensure they are fully informed and their rights are protected.”