Rent-to-own properties: how does it work in South Africa?

The South African real estate sector regularly goes through uncertain times with fluctuating market conditions which are largely determined by the prevalence rate of Covid-19. Households in particular are cautious about spending and acquiring property as well as business / career decisions bearing in mind that the prevalence rate of Covid-19 will determine the well-being of the business market.

It is therefore not surprising that the real estate market has seen an unprecedented number of house rental and acquisition.

According to Letsmoove Real Estate, the number of vacant rental homes in South Africa has increased by 50% since the start of 2020, as the coronavirus crisis wreaks havoc on household incomes. Across the market, 11% of properties are now empty. And only 60% of renters in more expensive properties pay their rent on time. On the other hand, information gathered from Ooba, who are considered to be South Africa’s leading mortgage experts, shows that first-time buyers are flocking to the market, accounting for 54% of mortgage bond applications. ‘Ooba processed in the third quarter of 2020, a 10% increase over the third quarter of 2019. For many people, the purchase decision is made after rental of a property for a period of time.

How to rent to become a homeowner in South Africa?

Option-to-buy rental is a legally permitted rental agreement under which a tenant decides to occupy a property with the intention of acquiring it at a later stage or at the end of the rental period. This is normally done with additional payments.

Types of rental contracts concerned

The rental contracts concluded in this regard are option-hire and purchase-hire. The difference between the two options is that the rental option gives you the option to decline to buy at the end of the rental agreement. In short, you don’t have to buy. Leasing buying, on the other hand, requires you to buy as originally agreed.

Advantages

• Renting to buy provides enough room for someone to organize enough finances that they can use for the security deposit for the purchase of a home and the legal fees involved.

• For those with bad credit, rent to buy allows you to rent while you clear your bad credit report.

• The purchase price of the good is normally fixed at the start of the contract. This means the seller cannot overestimate the price of the property if market conditions change.

Things to consider before entering into a lease-to-purchase contract?

• There is always the risk of losing money if the seller chooses not to sell the property.

• You must take into account your financial situation in the medium and long term. If your financial situation is set to improve considerably to allow you to make deposits or allow yourself an outright purchase, you must reconsider the rent to buy

• If you find a better house and a better neighborhood, it will be difficult to change your mind because you are already under a contract.

• You don’t actually own the property. You are therefore limited when it comes to making additions or renovating the property.

• If house prices go down, you are likely to buy a property at a price relatively higher than prevailing market conditions.

• Late payments can cause you to lose your right to buy. It could mean losing the amount you have accumulated for a possible purchase

• For the owner, you must pay particular attention to tax obligations in order to avoid any legal challenge. You may also want to consider appropriate home insurance in case the property is badly damaged before it is finally sold or if you decide not to sell.

From the above, it is clear that this is an attractive option for potential home buyers to consider.

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