09 July 2019
Struggling to get approval for a home loan? Finding it difficult to save that deposit? A ‘rent to own’ or ‘instalment sale’ might be the solution you’ve been looking for! Hendrik van den Berg of Just Property tells us more
It can be difficult for those who are self-employed, those who can’t afford a deposit and those who have no credit history in this country (e.g. young people, immigrants etc) to access home loans. But that doesn’t mean they can’t get one. The good news is that there is a little-known option that can help put you on the road to owning your own property. ‘Rent to own’, not to be confused with an Instalment Sale, is a type of lease agreement that includes an option to buy the property.
Usually the value of the property and the length of the contract is agreed between the seller/ landlord and the buyer/ tenant. Included in the lease agreement is the tenant’s right to purchase the property and an ‘option fee’.
In the case of an Instalment Sale, the lease agreement is structured so that the monthly instalments reduce the balance of the sale price so that at the end of the lease term (up to 30 years) when the balloon payment is due, it is more affordable, or the purchase price has been paid in full. Instalment Sales are governed by the Alienation of Land Act no 68/1981.
Meyer de Waal, director of MDW Attorneys, Notaries and Conveyancers, explains further: “As from 1981, Instalment Sales were introduced through the Alienation of Land Act, no 68/1981. The seller and purchaser agree in writing to sell and buy the property, but rather than approaching a bank for finance, the seller grants the purchaser the opportunity to pay off the purchase price and interest over a period of time.”
In a ‘Rent to Own’ agreement the option fees accrue in a deposit account for the duration of the agreement (from 6 to 24 months). At the end of the lease term, the buyer/ tenant now has the deposit plus the credit history needed to secure a mortgage.
The important thing to note here is that if the tenant decides to terminate the agreement and not buy the property, the owner of the property (or the financial institution you have an agreement with) retains the option payments and the tenant forfeits them.
Jenny Rushin of Betterbond says that around five out of the 500-600 agreements they originate each month are rent-to-buy deals. So these are not common, but banks such as Absa and African Bank are known to grant approval or assist with rent-to-own agreements to purchase.
To determine eligibility, up to 75% of the expected Future Rental Income can be included by Credit Lending in the Affordability Assessment, however, Credit Lending will apply a number of factors when utilising Future Rental Income. These are the suburb vacancy rate, the suburb’s good standing ratios, average gross yield per area etc.
Bond finance and Instalment Sales are very similar, and the bond application is treated as an ordinary bond. The usual processing and credit assessment checks will be done by the bank, and bond registration attorneys will perform the relevant compliance checks and documentation on their side.
In cases where a financial institution is involved, the institution will be legally registered as the owner until all instalments are paid. There are very strict rules pertaining to default, which the client must be aware of.
There are advantages to both the owner and the rent-to-own/instalment tenant. There are risks too and a water-tight agreement is essential, as is the need to carefully understand its full implications. One the one hand, there have been cases of such properties being sold to another party because the tenant-buyer didn’t understand the terms of the agreement, and on the other you hear of tenants not honouring the agreement or looking after the property. van den Berg suggests explaining the terms and conditions (of any contract) carefully to all parties involved.
Based on Just Property’s research, there is a clear need for solutions for people who desperately want to enter the market but cannot do so through conventional avenues. The rent-to-buy option is a solution such buyers should seek advice on.
Companies to approach:
For more information on Just Property please visit www.just.property or call (087) 004 0149