The Benefits of a Rent-to-Own Scheme in Real Estate
In a straightforward house purchase, a homebuyer offers to buy a property from a seller, who then accepts the offer. The parties, with their respective real estate brokers and in some cases lawyers, close the transaction, and the land title is transferred after taxes and other fees are settled. On the other hand, in a traditional lease agreement, a lessee and lessor agree on the terms of their lease contract, contracts are signed, deposit paid, and the lessee move into the property, promising to pay religiously his or her monthly rent.
These two transactions are the typical ways in which real estate change hands. But sometimes, there is an alternative way, such as rent-to-own houses in which the lessor/seller of the property agrees that the renter/buyer rent and occupy the property for a definite period of time, then the latter eventually buy the said property. It may sound simple and, for people who are short on down-payment cash, ideal. But how does a rent-to-own scheme actually work?
Rent-to-own House: How to Go about the Process
Also called a lease contract with an option to buy or a lease-to-own contract, rent to own homes are quickly becoming popular in the Philippines especially in Metro Manila. It is an alternative way for homebuyers to buy a home upfront, even if at the moment they do not have enough cash for down-payment. In a rent to own transaction, a homebuyer will be paying a monthly credit on top of the rent for the property. For example, a house for sale in Manila with a selling price of Php5 million is also being rented out for Php20,000. But with the rent to own option in place, the renter/buyer might pay a rent Php25,000 a month for an agreed-upon lease duration of two years: Php20,000 is for the actual rent of the house and Php5,000 goes to the rent-two-own credits.
The rent to own contract may stipulate that after the two-year rent period, the renter/buyer should buy the house, either in cash or through a housing loan, and the Php120,000 rent credits he or she has accumulated over two years will form part of the down payment. If the renter/buyer needs to shell out 10% as down-payment for the property, after two years he has already accumulated Php120,000 and will only need to pay Php380,000 more. What is good about this arrangement is that the homebuyer will have ample time to save enough money for the rest of the down-payment and fix his credit standing to qualify for a housing loan.
To avail of a house under a rent-to-own option, the renter/buyer must enter into an agreement with a lessor/seller and draft a contract. Therefore, it is very important to seek the help of a lawyer in drafting the said contract to make that all terms are legal and fair to all concerned parties. One very important aspect of a rent to own agreement is for both parties (lessor/owner and renter/buyer) to strictly abide by the contract. If the buyer/renter violates the contract, he or she risks getting his rent credits voided (the extra Php5,000 he or she has paid every month). On the other hand, if the seller violates the contract, he or she must return all the rent credits the renter/buyer has paid during the lease period and will have to go back and find a new tenant/buyer.
There may be downsides with a rent-to-own transaction. Licensed brokers recommend to both the buyer and selling parties to be very, very sure before signing anything because when they do, they must abide by what is stipulated in the contract. But definitely there are upsides, too, especially for homebuyers. One is that a rent-to-own transaction buys them enough time to build their down payment and fix their credit history, and finally becoming a homeowner in the process.
Finding a Rent to own House in Manila
A quick browse online of houses for rent in Manila will reveal many results of houses on a "rent to own” basis. Most of these properties are condos being offered by their real estate developers, especially those projects with plenty of excess units that were unsold during the pre-selling stage. In order to dispose of these condo units, developers offer them on a rent-to-own scheme, in which a renter/buyer will “rent” the property from the developer for a certain period (normally two years), after which he or she will then buy the said property either by paying cash or through a housing loan. On top of the rent, however, the renter/buyer makes lump sum payment at the end of each year that will form part of the eventual down-payment.
As an example, a newly built house or condo is ready for occupancy. The developer offers the said property on a rent-to-own scheme in which the renter/buyer will rent it for Php20,000 per month for two years, then must buy the said property after the lease duration. The contract may also stipulate that the renter/buyer will pay a certain amount on or after the 12th and 24th months (or after 1 and 2 years). This lump sum payment will eventually form part of the renter/buyer’s down-payment.
Although this rent-to-own scheme may sound ideal and pretty straightforward, renters/buyers are advised to very carefully read any contract before they sign, and if possible seek the help of a real estate broker or a lawyer. Some contracts may stipulate that the renters/buyers must purchase the property after the lease duration, and if they change their mind may be charged hefty penalties by the developer. In addition, the renters/buyers also must ensure to gradually improve their credit standing before the lease duration expires, to ensure that they will qualify for a housing loan later on.
However, although reading through all contracts and making sure that all terms and clauses are fair and legal might seem intimidating, keep in mind that a home purchase is a complicated process, regardless if it is done through the traditional buying arrangement or via a rent-to-own scheme. The latter, though a bit more complex arrangement, actually buys a person more time if he or she is currently short on cash and cannot pay for a house upfront, making it a potentially effective way to finally become a homeowner.