There are different ways to buy real estate like there are different properties, and knowing the differences can help better make buying possible.
When purchasing a home, there are a number of payment or financing options that buyers can make use of. Apart from home loans, which are typically government funded or offered by private banks, there are also choices to rent-to-own or to pay via in-house financing. Understandably, the two only respectively apply to properties put on the market as for-rent-to-own, or are brand-new and being sold by the developer.
Nonetheless, these are viable options when available, often offered on properties listed for sale online or featured in housing fairs. With the possibility of a great property buying opportunity just around the corner, it is beneficial to know how either of the two can help one acquire a dream home.
Rent-to-Own
Rent-to-own or lease-to-buy is an agreement that guarantees a renter the option of buying a leased property within a pre-arranged duration. Basically, it is being able to rent a home while working toward buying it later on. A well-drafted contract is key in buying via a rent-to-own scheme, where it must be ensured that both parties agree to all terms. These include rental rates plus a rent-to-own premium, purchase date, duration of the lease term, actual sale price, and other essential clauses.
Renting-to-own is suitable for buyer who cannot afford to pay for a huge down-payment in one go and to save for it during the duration of the lease—which normally lasts for two or more years—while also significantly paying off a part of the property’s price, and also build their creditworthiness for a better chance of being approved for a housing loan with better terms.
An advantage of renting-to-own is that the buyer can lock the property’s present price even though the actual purchase may happen after the end of the lease term. Also, in the event that the buyer finds the property or the neighborhood unsuitable, he or she can also decide to leave the property at the end of the lease term and look elsewhere.
Expectedly, there are also some caveats to renting-to-own. For one, it is commonly stipulated in most rent-to-own contracts that a lessor/buyer pay a rent-to-own premium on top of the monthly rent, and amount of which is paid towards the down-payment at the time the lessor is to buy the property.
For example, if the monthly rent of a certain condo in Makati is Php25,000, the rent-to-own contract may stipulate the lessor/buyer pay an additional Php8,000 per month as a rent-to-own premium. If the lessee has paid 24 months of this premium, then that is an accumulated Php192,000, which is credited as part of the down payment.
Another stipulation of a lease-to-own contract is the possibility of premium being forfeited if the buyer/lessor backs out before the end of the lease term.
In-House Financing
For buyers who want to pay for brand-new properties in a series of installments but not go the regular route of taking out a loan from a third-party institution like banks and other lenders, real estate developers also offer in-house financing.
Technically in-house financing is not considered a loan but an extended way of payment. The application is easy as developers are generally less stringent than commercial banks; with just valid identifying documents and substantial proof of income commonly enough to apply and be approved for in-house financing.
It must be kept in mind that this usually applies to pre-selling projects, but hardly for move-in-ready units. Another drawback is it commonly has steeper interest rates and shorter payment terms, which are significantly above the normal range common to banks. The duration for payment is also shorter than the usual 10 to 15 years offered by banks, and of course the up to 30 years offered by the Pag-IBIG Fund.
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