Housing in Southern Africa October-November 2016

News Housing

Rent to own options

Certain market conditions, such as tight credit conditions at the big commercial banks, have a knock-on effect on property affordability and often results in many buyers being unable to secure home loans.

I n these situations, cre- ative solutions like rent- to-own become an at- tractive option, according to Barry Fourie, Rawson Property Group. Fourie says that many people don’t even realise this is an option. It can be risky for both parties, so it’s important to fully un-

Rent-to-own can also be structured as a type of instalment sale, with an instalment agreement and a separate lease agreement running concurrent- ly. “The buyer could rent the property for a period, at an agreed rate, while paying off the purchase price in sepa- rate instalments. The laws governing this kind of arrangement are quite complicated, however, and there are very specific obligations placed on both parties.” He recommends taking legal counsel from a conveyancing specialist before entering into an in- stalment sale. Ironically, in the case of sectional title rentals, rent-to-own can be an automatic and unintentional bonus for normal tenants.

ly rental and acts as a down-payment or a deposit towards the future pur- chase. 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 prop- erty’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 themethodwithwhich any down pay- ments or deposits will be handled in

derstand what you are getting into before agreeing to anything, but there are situa- tions in which it

Barry Fourie

can be a viable solution. Themain attraction of rent-to-own is the fact that it eliminates the need for a large cash payment up-front. “These days, 100% home loans are rare andmost prospective buyers will need to budget for a deposit as well as the normal transfer, bond and attor- ney fees. These upfront costs can be significant – and if the buyer does not have the cash on hand, the purchase simply can’t go ahead.” 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 imme- diately 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. The details vary, but generally, in return for first right of refusal, an additional sum is added to themonth-

‘The buyer could rent the property for a period, at an agreed rate, while paying off the purchase price in separate instalments. The laws governing this kind of arrangement are quite complicated, however, and there are very specific obligations placed on both parties.’

“If the owner of a block of flats, for example, decides to sectionalise the building, the owner is required to offer first right of refusal to the tenants that currently occupy the units. The owner has to give the tenant a period of 90 days before the unit can be sold on the openmarket. Existing tenants who wish to purchase the property would be required to apply for finance, pay a deposit and legal fees etc. The first right of refusal offers the tenant an op- portunity to live in a property before decidingwhether it is worth buying.” ■

the event that the tenant accepts – or declines – the sale. “Without these stipulations in place, there is nothing to stop an unscrupulous owner from selling the property to someone elsewithout first offering it to the tenant, or raising the sales price somuch 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.”

October/November 2016