A rent-to-buy system may offer a practical solution to help homeowners on their way.
You have found your dream house; the offer to purchase is a done deal. Now all you have to do is persuade a bank to lend you the money.
Given the current economic climate, banks are more jittery than ever about lending to first-time homebuyers. If you don’t have a deposit or there is a spot on your credit record, your chances of getting approved are even slimmer.
Despite the recent “drop” in interest rates about half of home loan applications are turned down for these reasons.
TRY PLAN B
As few home buyers are able to obtain a 100 % home loan and a deposit of between 10 – 15% is required by the lending institutions, home buyers and sellers have to be more creative how to close a property transaction. We fine-tuned the Rent2buy concept over the past 10 years and our largest Rent2buy transaction was a for a R22 million farm transaction and just recently a R250 000.00 Rent2buy transaction says Meyer de Waal a conveyancing attorney in Cape Town.
The biggest problem we have with the Rent2buy concept is the available rent2buy stock, but with the prospect of working with a property developer who is to construct over 10 000 new homes and making some rent2buy units available, this may open up this opportunity to many more, says De Waal.
The rent2buy concept was developed and fine-tuned as an alternative for buyers eager to get a toehold on the property ladder sooner rather than later.
In this case a buyer who has been turned down by the banks – but who may qualify for a home loan in the future – rents the property from the owner for a fixed time frame (between six months and two years) with the intention of purchasing it at the end of that period.
It works best for an investment property being sold by the owner, or for a property developer, where the seller is willing to wait for a prescribed period before the sale goes through. However, De Waal says it can be applied to any type of transaction, including commercial properties. “This is plan B and an awesome opportunity for first-time buyers who have been turned down by the banks,” he says.
HOW IT WORKS
With rent2buy, the buyer has breathing space to improve his credit rating, if that is the reason why the loan was turned down. In addition, the rent2buy rental is about 3-4% more than the going rentals for the suburb in which the renter intends to buy (it is usually close to a normal bond repayment). This extra portion of the rental is credited towards a savings account for the potential purchaser to build up a deposit.
The rental period also gives the potential purchaser a test run at dealing with the realities of being a homeowner, as they take over all the associated responsibilities – such as rates, taxes and maintenance.
“Anything can happen over six to 24 months, while the first-time buyer is waiting to enter the market. Interest rates or house prices can skyrocket. This put owning a home further out of reach. So, part of the beauty of the programme is that the purchase price is usually frozen at the original amount, unless the term is longer than 12 to 18 months, to be fair to the seller,” says De Waal.
BREAKING DOWN THE COSTS
If one was to take a typical property worth R1m, it would be rented out for R7,000 a month. The landlord carries the expenses of rates, taxes, insurance, levies and maintenance – in total about R1,000 – and ends up with R6,000 a month in his pocket.
But as part of the negotiation the rent2buy tenant offers a higher income with a rent2buy rent, close to a home loan repayment based on the purchase price – say R10,000 a month for a R1m property. The tenant also takes over R1,000 of expenses (rates, levies etc). And so the seller has a much improved cash-flow during the rent2buy term: an additional R3,000 and R1,000 of expenses. That is a R4,000 improvement. Meanwhile the rent2buy tenant “tests” his affordability capacity to pay back a bond and own a property in real circumstances.
“To assist the purchaser in saving towards a deposit – the third leg of raising a home loan, after credit profile and affordability – this ‘extra’ portion of the rental is credited towards a downpayment of the purchase price”
To assist the purchaser in saving towards a deposit – the third leg of raising a home loan, after credit profile and affordability – this “extra” portion of the rental is credited towards a downpayment of the purchase price. In this instance, after a year, the potential buyer has 12 months of R3,000 – totalling R36,000 – saved as a deposit.
EDUCATING THE BUYER
Possibly the most valuable tool offered in the rent2buy process is the education component. De Waal is passionate about helping people buy their first home. By teaching them to manage their budget during the rental period, his system provides long-term skills in how to meet home payments and reduce their risk to banks.
Potential buyers enroll in the My Budget Fitness programme, which evaluates their current credit rating and provides a comprehensive affordability analysis. Once a new budget has been drawn up, the buyer can manage their money through rent2buy’s mobile2budget app. Using their phone, the buyer captures their expenditure every day, which is synched with their online budget. Logging on to the secure website at the end of each month allows comparisons of their spending with their budget.
Buyers are also assigned mentors who contact them monthly to discuss their progress and make suggestions about where they can reduce costs. Once the budget fitness goal has been reached, the mentor also helps with a final affordability calculation, obtaining an improved credit record and submitting the home loan application.
PROTECTING THE OWNER
For a property owner, a rent insurance product offered by rent2buy offers protection, ensuring that the rent is paid into their bank account on the first of each month. The insurance administration handles the rental collection, pays rates, taxes and levies and provides a reconciliation of all payments. “The policy also covers the rental income for three months if the tenant defaults during the rental period,” says De Waal.
Buying a house for the first time can be a sharp learning curve. When things don’t go according to plan, rent2buy presents an option to prepare a new homeowner for the financial responsibilities of owning a property.
For more information – contact Meyer de Waal – firstname.lastname@example.org
This article first appeared in BusinessDay Home Front.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)