Houses

Rent-to-Own Properties

As with any financial scheme or arrangement, rent-to-own agreements can have its downside and also its upside. But first, let us define what is meant by a rent-to-own agreement. Simply put, it is a contractual arrangement whereby the tenant (renter) is given the option by the owner (landlord) to buy the residential property that he is currently renting sometime into the near future (usually between 1 to 3 years; in some cases 3 to 5 years). Although this option, also called a “lease-purchase agreement” in some countries, refers to the near future, the sale price is reckoned or agreed upon today, using today’s various valuation methods.

Now, let us look at the upside of a lease-option from the point of view of the potential buyer (in our case, it is the tenant). Firstly, it gives the tenant the time to think through and think over his plan to buy the property where he currently lives. Does he like the neighbourhood? Or the community? Is it near his workplace? Is there heavy traffic during rush hour within the area? Whatever it is that is crucial or important to him, the fact is, he does not have to decide right now to buy the property, giving him the luxury of time to observe the property itself, whether it requires expensive repairs and maintenance, gets flooded easily, is noisy during evenings, etc. In an area where real estate properties are rising due to a booming economy, it might be very profitable to sign that option and gain considerably from the price appreciation down the road.

The downside is that this arrangement is a potential disaster if not handled very properly. As with any financial obligation, it is always best to cover all your bases. In most rent-to-own schemes, the tenant pays higher than the usual normal rent, with a part of the rent accumulated and considered or credited towards the eventual down payment. Additionally, the renter is also usually required to pay up a certain amount or fee that is variously termed as “option money”, “reservation money”, or “good faith money”. In any event, watch out for that contract provision, which may be there or not depending on who the seller is, which forfeits your option money once you do not exercise the privilege.

It is best to talk to a potential lender or banker about the eventual financing you will need for this. Further, with this arrangement, you are essentially asking the landlord to save money for the deposit in your behalf. This is something anyone with good fiscal discipline can do and still retain that flexibility to look at other equally attractive properties. With good financial advice, rent-to-own schemes can be your rags-to-riches story, or conversely, your road to ruin.