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October/November 2016
News
Housing
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-
derstand what you
are getting into
before agreeing
to anything, but
there are situa-
tions in which it
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-
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
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.”
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.
“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 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.’
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.
Rent to
own
options
Barry Fourie