Figuring Out If You Should Go for a Rent-to-Own Property

By:Izak Kiefer Lim|July 23, 2019

Many Filipinos dream of having a home, but not all have the means to buy real property right away. In the Philippines, where most people are cash-strapped, purchasing a home outright or even getting a mortgage is out of the question. While they save up for their ideal home, they find houses or apartments for rent in the meantime. Yet, rental dwellers can’t help but feel that they are wasting their money paying for property that they won’t own in the future. For those caught in this quandary, rent-to-own properties provide a middle ground between buying and renting. This makes it a viable option for buyers who want more flexibility with their buying decisions.

How rent-to-own schemes work

A rent-to-own scheme is an arrangement that gives the lessee an option to commit to purchasing the property after a certain period leasing the property. The requirements for this type of home ownership is less stringent than a mortgage, which requires a good credit score and bigger cash  down payment upfront.

There are two main types of rent-to-own arrangements: a lease option agreement and a lease-purchase agreement. A lease option agreement gives the lessee the right but not the obligation to purchase the leased property. On the other hand, a lease-purchase arrangement legally binds the lessee to purchase the property after the agreed date of the monthly rent.

Payments Needed

In a rent to own arrangement, there are three payments lessees must make to own the house.

Purchase Price

It is important to specify in the rent-to-own contract when and how the purchase price is made. The purchase price dictates the upfront fee and the monthly rent. It is a price that is usually higher than the market value since the purchase happens on a later date. For this reason, the lessor and the lessee should have a clearly worded contract with stipulation on the interest rates to avoid disputes later on.

Upfront Fee

In a rent-to-own arrangement, lessors are required to pay a non-refundable upfront fee of 2% to 7% of the purchase price. This is called the option fee, which will give the lessee the option to buy the house on a future date. Furthermore, the option fee is negotiable as there is no standard industry rate.

Monthly Rent

After paying the option fee, then comes the monthly rent. The monthly rent will be charged with an interest rate, which will also be credited when the time comes for the lessee to purchase the home later on. Take note that the Rental Reform Act of 2002 forbids the lessor from increasing the monthly rentals by not more than 10% annually. However, this does not apply to rent-to-own schemes. This means that the lessor has a free hand in increasing the monthly rent in a rent-to-own arrangement, except if he agrees to limit the increase in the contract. Again, examining the contract for these stipulations will save lessees from financial troubles for the life of the lease agreement.

Should you opt for a rent-to-own property?

As buyers decide what kind of property they want to own, a prime consideration is their ability to pay. Buying property outright rarely happens, except if the buyer is  a corporation or a wealthy individual. On the other hand, getting a mortgage involves fulfilling stringent requirements, such as having an excellent credit score, and making a cash down payment equivalent to 20% of the property’s purchase price. Hence, the rent-to-own option is more suitable for people who are ready to commit to paying for a property but do not have good credit scores yet, and have not saved up a significant amount of cash. A rent-to-own arrangement gives the buyer more flexibility and time to acquire the property. This is because the buyer rents and pays interest to be credited until the buyer has accumulated payments equivalent to 20% of equity on the property. In comparison, a mortgage agreement requires an upfront 20% downpayment of the property’s purchase price. 

There is no perfect time to purchase a property. But when one is ready to commit to paying for a rent-to-own property after doing due diligence, then they should give it serious consideration.

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