Dubai: You would struggle to qualify for a mortgage if your credit scores are too low, unpaid credit card dues have piled up, or you’re struggling to put up the initial down payment for a new home.
If you’re at such an impasse, you can enter into a rent-to-own agreement and begin living in a home today — one that you might be able to buy eventually. However, there is reason for caution.
“You need to be careful when entering rent-to-own arrangements,” said Dubai-based property consultant Prakash Bhat.
You may end up losing money that you didn't need to spend
"A lot of times homebuyers or tenants end up losing money that they didn't need to spend, so before agreeing to any rent-to-own contract, it’s vital to know how you will personally and financially benefit.”
Is there any protection to a rent-to-own buyer who falls behind on payments? Could you end up losing everything that you had paid toward the purchase if you lose your job?
These worries, and others, are why you need to do your research before signing a rent-to-own agreement. It's also why you need to know these key facts before agreeing to any rent-to-own contract. Here’s what you need to keep in mind before you decide to rent-to-own.
A lot of times homebuyers or tenants end up losing money that they didn't need to spend
You pay a bit more in rent each month to the owner of a home
In a rent-to-own arrangement, you might pay a bit more in rent each month to the owner of a home. These extra dirhams go toward reducing a final sales price for the home that you and the owner agree upon before you start renting.
Then, after a set number of years pass — usually anywhere from one to five — you'll have the option to purchase the home, with the sales price lowered by however much extra money you paid along with your monthly rent cheques.
“Not all companies that offer rent-to-own homes work this way. Some don't ask for more money from tenants each month, and don't apply any rental money toward lowering the eventual sales price of the home,” added Bhat.
Know how much monthly rent is related to the final selling price
“This latter option might be the better choice for you if you're not certain that you'll be able to qualify for a mortgage even after the rental period ends. A pitfall is if the tenant buyer signs into the program but will never be approved for financing, thus never purchases the house."
So make sure you know — and are comfortable with — the home's final sales price and monthly rent payments before you agree to a rent-to-own arrangement.
To start the rent-to-own process, you and the owner of a home sign a contract listing what the home's final sales price will be after the rental period ends. The contract will also list how long you will rent the home before you have to decide whether to buy the property.
The document will state, too, how much you'll pay in rent each month, and how much of that money will go toward lowering the home's final sales price.
Be aware that ‘Option Premium’ is non-refundable, even if you don't decide to buy the house after your rental period comes to a close.
What happens to the extra money if you don't end up buying the home?
After you and the homeowner sign the contract, you'll pay what is some times known as an ‘Option Premium’. This premium is what gives you the right to purchase the home after the rental period ends.
“Be aware that ‘Option Premium’ is non-refundable, even if you don't decide to buy the house after your rental period comes to a close. You can expect to pay about 5 per cent of the home's final sales price for your option premium,” said Abu Dhabi-based independent property agent Ela Ferrante.
“If you don't end up buying the home after the rent-to-own period ends, you'll likely lose the extra money you paid each month to your landlord. Most landlords include a provision in contracts stating tenants lose the extra rent sent in every month if they pass on their option of purchasing the home.”
Bottom line?
There are several benefits for sellers when it comes to rent-to-own properties. Firstly, sellers can advertise higher sales prices while offering rent-to-own schemes, in exchange for more flexibility.
However, if you don’t want to pay extra in rent each month for a home that you might never end up buying, a rent-to-own agreement might not be for you.
“Keep in mind that you don't want too little of your monthly rent going toward a home's final sales price. If it does, you'll barely make a dent in that final sales price,” added Ferrante.
“If you're not certain that you will end up buying the home — and after five years or so of renting a home you might decide that the property or neighbourhood is not the right one for you — be wary of entering a rent-to-own arrangement. You might be throwing away all those extra dirhams each month.”
But the bottom line is that it’s still a win-win situation for sellers, when it comes to rent-to-own houses. This is because even if the buyer chooses not to buy the property at the end of the rental contract, the seller still benefits from having earned a higher rental income.
Liabilities at the end of the agreement will depend upon the terms of the engagement. In some cases, the seller will have to reach out to other potential buyers if the option to purchase is not exercised, experts advise.
They also point out that the legal and regulatory structure surrounding the schemes are to protect the rights of the purchaser (tenant) and seller (developer). Those wanting to go the rent-to-own way do have ample safeguards offered to them by the Dubai Land Department (DLD). These transactions have to be registered with the government agency, according to multiple law firms.
The Land Department maintains the registration system for such rent-to-own arrangements, and it requires fees to be paid by the seller and the purchaser before registration will be accepted.
Purchasers need to be certain that the premium that they are paying is being held, probably in an escrow account, and being used for the intended purpose with their interests in the property as the “owner”, subject to conditions, no matter what the status of the developer may be in the future.
Similarly, the developer needs to know that should the prospective purchasers default on their payments, they have the ability and right to take possession of the unit.
While the DLD has issued necessary guidelines and associated fees related to the registration, cancellation, financing and transfer of contracts, the schemes that have been available to date have been developed individually.
