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Understanding the Rent to Own Scheme
Traditional forms of owning or using a property may be obtained via a direct purchase or a lease agreement. A direct purchase is when a seller offers a property to a buyer. Either through a buyer-seller deal or through a real estate broker or any form of intermediary, the transaction is created and completed. The land title and other pertinent documents are transferred to the buyer after all taxes and fees are settled. On the other hand, a lease agreement involves a lessee and a lessor agreeing on a lease contract. A contract is signed along with a deposit paid to the lessor. The lessee then pays a regular due (i.e., monthly rent) to the lessor throughout the life of the contract.
However, a middle ground in achieving the rights to the ownership of a particular property also exists. This is known in the Philippines as a “rent to own” scheme. In this ownership scheme, the renter or buyer eventually becomes the permanent owner of the property he or she is leasing. The lessor or seller agrees to allow the renter or buyer to rent the property under certain terms, particularly under a fixed period of time, before finally buying the property. The scheme is a simple form of obtaining ownership to a property and often benefits those homebuyers who are constrained by required cash advances or down-payments.
Rent to Own Condo in the Philippines: How It Works
Also rigorously applied to rent to own homes, the rent to own scheme works the same for condominiums. Also called a “lease contract with an option to buy” or a “lease-to-own contract,” rent to own schemes are becoming popular with the surge in demand for residential condo units in Metro Manila. In a rent to own condo, an agreement gives the renter the right to purchase a leased property after an agreed period of time. Prior to contract signing, details relevant to the agreement like the monthly rental rate, the sales price, the purchase date, and the interest rate must be agreed upon. Since rent to own schemes are owner financed, meaning the owner is the party that offers the financing to buyers, the monthly rate for a rent to own scheme is significantly higher. This is due to the fact that a portion accrues to the down-payment if and when the renter finally decides to buy it. If the renter decides not to buy the condo unit, all payments made goes to the lessor. This is the lessor’s incentive for taking the condominium unit off the market while it was being rented. It is noteworthy to point that the sales price is a stipulated fact in the contract. It is final and can never be altered even under conditions when the property’s value has changed during the lease period.
Take for example a condo for sale in Manila. With a selling price of, say, PHP 10 million, a rental fee of PHP 50,000 per month is issued. If the rent to own condo scheme is chosen by a buyer or renter, the rental fee with a lease duration of two years, for example, should be higher than PHP 50,000, let us say, PHP 75,000. The PHP 25,000-increment goes to the rent to own credits. So, within a two-year lease duration, the credits will amount to Php600,000. This amount becomes part of the down-payment. If the required down payment was PHP 1 million or 10 percent of the condominium unit’s value, the renter only had to produce PHP 400,000 to meet the down-payment then he or she can finance the remaining balance through a housing loan or other in-house financing instruments.
In a rent to own condo scheme, the benefits to both buyers and sellers are fundamental: buyers get to acquire the condominium unit, and sellers earn from the sale. Buyers are given the opportunity to own a condo with an option to drop it and look for better deals on or before the date of purchase. Sellers, meanwhile, generate returns from the property, and when buyers opt to discontinue, nothing is lost since the sales price is locked in.
However, there are risks involved in such arrangements. First is on rental payments. The cost to the buyer when he or she decides not to purchase the condo is forfeited rental payments. Late rental payments may also lead to the eviction of the renter in which all payments, both down-payment and all of the paid rent, are lost. Second is the condo’s market value. If its market value depreciates, the buyer is left with paying for a higher price for the condo (since sales price is fixed). For the lessor, any appreciation of the condo’s market value will not impact him or her positively. Lastly, a risk on the part of the lessor is the inability to pay mortgage to the house being leased. If the lessor cannot pay the mortgage, all paid rent is forfeited and the potential buyer eventually loses the chance to purchase the condo unit.
To learn more about rent to own schemes in the Philippines, it is imperative to browse through the provisions of R.A. 9161 or the “Rental Reform Act of 2002”.
Opting for a “Rent to Own Condo” in Metro Manila
Metro Manila is teeming with hundreds of condominiums, old and new. The outlook for the Philippine real estate market through 2020 is roseate as the rapid growth of the business process outsourcing (BPO) sector is being matched by the increased demand for retail and commercial properties. Metro Manila has the largest share of the Philippine real estate market. The surging demand for vertical residential spaces is largely brought by the increasing popularity of condominiums. The expanding BPO sector, which is resulting to a rise in the demand for labor, is fueling the increase in demand for residential space in the Metro.
Finding a condo unit in Metro Manila is not difficult considering the very productive real estate market. To check listings for rent to own condos, a quick online search for a condo for sale in Manila would provide numerous results. A great number of these are units that were not sold during the pre-selling stage. Many developers are disposing of these units by offering them on rent to own schemes.