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Wednesday Jun 28, 2017

Rent-to-own increasingly popular

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 “red tape" 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.

  • Pros and cons for both parties in rent-to-buy

    Cliffe Dekker Hofmeyr details the pros and cons of rent-to-own:

    Advantages For tenants/buyers:

    Many tenants prefer to purchase rather than rent, but do not qualify for loans because of factors such as no credit record, unstable income, lack of proof of income and so on. A rent-to-own agreement gives them the opportunity to acquire the property they are renting at a later stage. The tenant is entitled, but not obliged to, purchase the property at any time during the lease period or just before the expiration thereof.

    Because the agreement must specify the purchase price and all other terms with which the owner will sell the property to the tenant, they will have certainty regarding the purchase price and the sale terms and conditions.

    The tenant has the advantage of occupying the property for a period before having to elect whether to purchase it. This allows them to decide whether they still want to buy. For landlords/owners: In difficult economic times, when funding is not readily available and financial institutions impose stricter lending criteria, a rent-to-own agreement will ensure the landlord earns rental until the tenant qualifies for a loan.

    A tenant who intentionally wishes to conclude such an agreement, as opposed to a standard lease agreement, is more likely to be committed to comply with all obligations set out in the lease agreement.

    Disadvantages For tenants/buyers:

    The agreement is more complex than a standard lease agreement.

    The landlord might want to charge for granting the option as he is prevented from selling the property to another purchaser during the lease period. This may affect the rent or additional consideration may be payable.

    The lease agreement may contain onerous maintenance provisions and obligations, and tenants should make sure they understand the terms and conditions. For landlords/owners: The landlord may not accept any offer made by a third party to purchase the property until the option period - normally the lease period - has expired.

    As the purchase price must be contained in the "rent-to-own" agreement, the landlord will be bound to such price and may not renegotiate it at a later stage.

    Although the agreement may contain an escalation clause in terms of which the purchase price escalates, it is not always easy to predict market conditions and the escalation may not be market-related at the time the option is exercised.

    Bonny Fourie
    Property
    Weekend Argus (Saturday Edition)

    Independent Property appears every Saturday in the Weekend Argus

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