It sounds like what a perfect deal should be. A house is being offered for rent. But the owner is not exactly cash-strapped (he or she owns several properties being rented out), so he offered it to a tenant on a two-year lease with an option to buy after the contract—an option that is more commonly known as rent-to-own.
The terms are quite manageable. The aforementioned Php1.5 million suburban house is being rented out for Php15,000. But with the rent-to-own option in place, the renter/buyer might pay a rent premium of Php20,000 a month for two years: Php15,000 for the actual rent and Php5,000 in rent credits.
After the two-year lease contract the renter/buyer should agree to buy the house, either in cash or through bank financing, and the Php120,000 rent credits he or she has accumulated over two years will form part of the down payment. To make the deal even sweeter, the tenant has two years to prepare the rest of the down payment, so by the time he starts bank financing he already has at least 20 percent equity on the property. In some cases the seller will also charge the renter/buyer an option fee—payment for the right to purchase the property after the lease term, which again will form part of the down payment.
Sounds like a fair deal, isn’t it? But in reality, a rent-to-own option works better in theory than in practice.
Financial advisor and real estate broker Jake Nasol Loria says,
A pretty good deal, but it could get very messy.
Most of the time it becomes a nightmare if one of the parties doesn’t fulfill its end of the bargain.
Common Scenarios
Looking around one can easily spot properties being offered on a rent-to-own option. Normally Filipinos would think rent-to-own options as a marketing strategy to sell affordable homes, but now even those built by major real estate developers are being offered on such terms, perhaps in an effort to get rid of excess inventory, to boost sales, or both.
One example is properties developed by Megaworld Corporation. According to Adrian Paul Tan, a real estate salesperson for Megaworld, a 36-sqm studio unit in one of their condo projects in Newport City in Pasay is being offered for Php4,799,750. If a client agrees to rent and eventually purchase the property using their 10 + 10 + 80 payment scheme, he needs to make a 10 percent down payment, after which the buyer can already move into the property. Another 10 percent down payment will be paid over 24 months (for a monthly amortization of Php19,998.96), which constitutes the monthly “rent.” After two years when the 20 percent down payment has been fully paid, the buyer will then need to get bank financing to pay for the remaining 80 percent or pay in cash.
Another is Cebu-based property developer MSY Holdings, who is offering their Lapu-Lapu City development Bayswater under rent-to-own scheme to hasten the sale of their remaining units. Under the scheme, buyers who have paid reservation fees, passed the capacity-to-pay requirements, and have given 2 months’ deposit and postdated checks for the monthly rental can move into the property after 30 days—certainly a more favorable scheme than buying preselling, which can take years to complete. Once buyers achieved 20 percent equity on the property, they can start financing either through bank or Pag-IBIG loan.
Another common way to avail of a rent-to-own option is to enter into an agreement with a property owner, agree on a rent-with-an-option-to-buy scheme, and draft a contract. Although this happens more frequently in the United States, especially for families looking into disposing properties they are not using, it is not uncommon in the Philippines. But in this case, renters/buyers should seek the help of real estate professionals—brokers to facilitate the transaction and lawyers to carefully draft the contract.
Pros and Cons
According to Tan, some of the benefits of a rent-to-own option for the renter/buyer include the chance to immediately move into a property even if his down payment is minimal (in this case 10 percent of the total contract price of the property). He can also lock in the property’s purchase price, which is quite favorable in case of a buoyant real estate market like Metro Manila where condo prices are expected to increase over the next few years.
A rent-to-own option can also be a great way for cash-strapped but credit-worthy buyers to own a home upfront (specifically those who do not have big enough savings to pay for down payment). As bank financing will commence after the end of the lease term (usually after 2 or even 3 years), the renter/buyer will have plenty of time to fix his credit and get approved for a mortgage loan.
For sellers, a rent-to-own option is a good way of getting rid of inventory that’s been sitting on the market for months. In addition, renters who will eventually become the owners generally treat the property better, because they’re planning for the future, instead of living in a place they’ll vacate in a year or so.
However, as attractive as they could be, rent-to-own schemes also have disadvantages both for the seller and the renter/buyer. For instance, if the latter for whatever reason decides not to purchase, the extra rent paid during the lease term will not be reimbursed. The seller then earns this extra cash as income, but then again he’s back to square one and will need to find a new tenant.
And at the end of the rental period, the buyer may still not be able to buy the home for the same reasons he couldn’t buy at the start of the lease: being unable to qualify for a home loan due to bad credit, and insufficient down payment and monthly income. He or she will then go back to renting.
What Can Buyers and Sellers Do
They say that the devil is really in the details, and this is particularly true when drafting a rent-to-own contract. A clearly worded and properly executed contract will save both parties a lot of headache later in the transaction. Here both parties will need the expertise of a lawyer, says Loria.
A real estate property is a big investment and thus creating a [rent-to-own] contract should not be taken lightly.
Sellers are also at risk if they enter into an agreement with the wrong kind of renter/buyer, said Janet Portman, an American real-estate attorney and co-author of Every Landlord’s Legal Guide.
You really need to weigh the risks of leasing to someone that you wouldn’t sell to today.
Bernadette Dayang, a real estate broker for Makati-based Vesta Homes Realty, says although she gets a good number of inquiries about rent-to-own homes, she always advises a renter/buyer be a tenant first, especially those without large enough cash to pay for down payment, then decide later on if he’d like to purchase the property.
I advise them to sign a contract for a longer-than-usual lease before they agree to buy the property.Usually calling them lease with an option to buy, she says that in this case the renter/buyer can have plenty of time to know the property and community thoroughly and to build his down payment before looking into purchasing.
Buyers/renters are also advised to stick with the contract, as violations may void part, if not all, of the rent credits they’ve paid. Although most horror stories I’ve managed to dig up were from the United States, Filipino homebuyers can get insight on how messy this option could get if they’re not cautious. For example, a scrupulous landlord/owner may charge a ridiculously high option fee and look for any opportunity to cancel the contract, just to get another tenant to move into the property and charge another option fee.
Also there are cases where a contract stipulates that late payment may void the rent credit for that particular month. Hence, the renter/buyer who signs such an agreement must pay on time, every time, or risk not building enough equity on the home. This is particularly important when he aspires to get qualified for a home loan later on.
But ultimately since a home is the biggest purchase a person can make, being an undetermined buyer may mean one is not ready to purchase. One indication of determination, as they say, is having enough money for down payment. This is particularly important because banks usually look at one’s ability to pay before they approve a loan application.
Also, not having enough cash to pay for down payment may mean one is not qualified to become a homeowner just yet, an observation that Loria shares.
If a you as a buyer cannot afford to buy a condo/house, don’t buy it. If you’re not qualified for bank financing (that’s why you’re going for a rent-to-own option), then probably you’re not qualified to own a condo/house for the time being, so it’s best not to push the issue.
Home ownership being a cherished aspiration for Filipinos, I’m guessing rent-to-own schemes are here to stay. A great majority of Filipinos still cannot afford to purchase their own homes, and unless the government devises a scheme to help first-time homebuyers (similar to the UK’s Help-to-Buy and Brazil’s Minha Casa, Minha Vida), private businesses and individual property owners will fill the gap. After all, These people are in the business of selling properties, so anything that can boost their sales is most welcome. Regulation, though, is necessary, because as I’ve said, the scheme can get messy.
