UGANDA, Kampala | Real Muloodi News | If you want to own a home but have limited cash, a rent-to-own agreement may be the best alternative for you. Rent-to-own refers to the practice of renting a home for a certain length of time, with the intention of purchasing it at the end of the lease term.
Here is what you should know about rent-to-own agreements:
Rent-to-own allows you to own a home without initially raising a mortgage or significant deposit. The buyer pays rent throughout the lease, and sometimes, a percentage of the payment goes toward the purchase price, or can be used to support a mortgage application.
Rent-to-own agreements should specify how and when the property’s purchase price is determined. Sometimes the buyer and seller will agree on a purchase price when the contract is signed. In other situations, the price is determined when the lease expires based on the property’s then-current market value. However, many buyers prefer to ‘lock in’ the purchase price, especially in markets where home prices are trending upwards.
According to Jackson Mayanja of MTK Real Estate and Mining, “The buyer pays according to the agreement, either in instalments, or full payment on the agreed date. Both tenants and landlords can benefit from these arrangements, but it is essential that everybody knows what the risks are before getting started,” Mayanja explains.
Lease-Option vs. Lease-Purchase
There are different types of rent-to-own contracts. Some are more buyer-friendly and flexible than others.
Lease-option contracts give you the right, but not the obligation, to buy the property after the lease expires. If you decide not to buy the property at the end of the lease, the option simply expires and you can walk away, with no obligation to buy or continue paying rent.
With lease-purchase contracts, you are legally obligated to buy the home at the end of the lease, whether you can afford to or not.
Mayanja says the terms of the agreement can be negotiable. For example, both parties may request specific details before signing an agreement, such as a larger or smaller up-front payment. He says, “Both the tenant and landlord agree to certain terms, and all the terms can be changed to fit their needs. Depending on what is important to both parties.”
Mayanja also suggests reviewing the contract with a qualified real estate lawyer before signing anything, so you know your rights and exactly what you’re getting into, and to avoid scams.
According to Juliet Naiga, who bought a house on lease, the tenant pays the landlord an option premium/option fee at the beginning of any rent to own transaction, which is later applied to the purchase price.
This fee gives you the option to buy the house on some date in the future. This fee usually nonrefundable, so you don’t get your money back if you decide not to proceed with the purchase.
Although, the option fee can sometimes be negotiable, as there’s no standard rate. The fee typically ranges between 1% and 5% of the purchase price.
On the other hand, the buyer saves some money on the fee they would otherwise pay to realtors for brokering a property sale.
According to Naiga, both parties should agree on a purchase price for the home and a time frame in their contract.
“When setting the price, the landlord has to consider the state of the property. If the home has gone up in value faster than expected, things work out in the tenant’s favour,” Naiga explains.
Before closing the sale, Naiga recommends that the agreement clarify who is obliged for routine maintenance and major repairs. With some rent-to-own contracts, this responsibility may fall to the buyer.
Some leases demand that the landlord must perform repairs or save money by collecting rent from the tenants before proceeding with the acquisition.
Risks of rent-to-own
- If home prices decline, you have no option but to sacrifice all of your option money in buying the house.
- Depending on your agreement, if you don’t pay your rent on time, you may lose your right to purchase, and all the already made payments are non-refundable.
- There may be hidden issues with the property that don’t come to light until you buy it, such as title issues and ownership issues. This is why it is important to always involve property lawyers, just as you would with any other property sale.
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