For some people, owning a home in the Philippines is difficult. To some, it is almost impossible. Reasons vary, but perhaps the most common is lack of money for down payment. This consequently creates a huge population of young urban renters, unqualified yet for bank financing to purchase a home because of lack of fund or credit history, but who nonetheless can afford a monthly a rent.
How can sellers take advantage of this potentially huge market? Rent-to-own scheme might do the trick. But does it work? What are its potential pitfalls? Read on to know more.
How It Works
Similar to a car lease common in the United States and other countries, renting to own a home works by means of a seller giving his or her tenant the right to buy the house at some point in the future, usually one to three years out, for a price that is agreed upon today.
It usually works this way: a tenant will pay a fee (called option money) that will keep open the option of buying for him. In addition, the tenant will pay about 20 percent above the typical rent for the house. Therefore, if a home were to normally rent for Php20,000 per month, a rent-to-own tenant would pay Php24,000, of which the Php4,000 will be credited to the tenant for an eventual down payment. If the tenant and the owner agreed to commence the buying option after 3 years, the tenant would have accumulated Php144,000, which will form part of his down payment.
This sounds like a win-win for both seller and tenant. A seller who’s having trouble getting rid of a house and can no longer afford the mortgage payment will have a tenant and a sure buyer in the future. On the other hand, a tenant who’s priced out of the housing market can financially prepare for the prospect of finally owning a home.
The Pitfalls
Unfortunately not all rent-to-own deals end well. According to Las Vegas-based lawyer Doug Malan, these arrangements often work better in theory than in practice. “It can be a nightmare on both sides” if one party doesn’t fulfill its end of the bargain.
For instance, if the tenant suddenly decides not to go ahead with the purchase, none of the extra money he paid to the seller comes back to him. Hence, he ended up paying above-market rent and has no extra cash to show for it. In some cases, the tenant is also responsible for repairs and maintenance during the lease term, and any money spent into the rent-to-own property will not be reimbursed.
Then there’s also the possible scenario when the buyer religiously paid his installments but the seller did not pay his amortizations to the bank and at the end of the term of the contract, the seller had nothing to turn over to the buyer as the bank has already foreclosed the property.
How to Make It Work?
How can sellers and buyers make this option work then? Just like any business deal, it needs a complete trust between the seller and the tenant. It’s important that the two parties have a good professional relationship, as they will be working closely together for very a long time.
One of the ways for both parties to come out happy from a rent-to-own agreement is to carefully word the contract and make it favorable to both parties. For example, the tenant must understand that the seller is locking the property for him, and should he decide not to go ahead with the purchase, he forfeits all the extra money he paid the seller.
On the other hand, if the tenant, after religiously paying his rent plus rent-to-own premium, finds himself with a foreclosed property because the seller did not pay his amortizations to the bank, a clause that specifies that the buyer shall be entitled to full refund of premium plus interest can be included in the contract. This signifies the seller’s good faith and somehow gives assurance to the buyer that the seller is legally binding himself through the contract.
Being able to buy a home through a rent-to-own agreement can be very good for both owner and renter. It is important to have your agreement be one that both sides are happy with, and that is legal in every way.
Joe Manausa, broker-owner of Century 21 First Realty in Tallahassee, Florida, admits that although rent-to-own options are risky, they are a good transitional step to relieving a grossly oversupplied market and to accommodating first-time buyers priced out of the market.
