Homeownership Option 2: Rent to Own Properties

Homeownership, especially for a first-timer, can be challenging. There are different routes to take, and you have to explore each one of them and settle on the one that makes the most sense to you financially. With many factors to consider, it's essential that you take the time to educate yourself thoroughly on each option.

One such option that has been gaining ground among homebuyers in Kenya is rent to own. The biggest advantage this path offers over others is the fact that it gives you the option to test the house before buying it. You get to live in the house and explore the neighbourhood; if it doesn't work for you, you can pack and move to a different home. 

This second edition of the six-part series about homeownership routes you should explore will cover everything about rent to own. What it is, the pros and cons, how the process works, and the pitfalls to avoid if you choose this path. 

Read Also: 9 Ways for Owning a Home In Kenya

What is Rent to Own? 

Rent to Own is a homeownership path that involves leasing a house from a seller for a specified period (months or years) with the intention to buy it before or after lease expiration. 

Per your agreement with the seller, you will pay extra rent monthly, with the additional money going toward your down payment. This extra money you pay is called the rent option or rent credit. 

There are two types of the agreement you can reach with a seller: 

Lease Option Purchasing - You are not obligated to buy the house with this contract. When the lease is up and you can't afford the home or don't like the place, you can choose to vacate. If you decide to move, you will forfeit the money you had paid toward the house down payment. 

Lease Purchase - With this agreement, you sign a legally binding contract to purchase the house upon lease expiration. Even when you can't afford the home, breaching this contract usually carries severe legal implications and can cost you. 

Rent to Own is suitable for you if: 

1. You want to avoid paying a hefty down payment when buying a house. 

2. You want to test the house before buying it. 

3. You want a little more time to save, invest or liquidate to buy a house in cash. 

4. You want to get your creditworthiness up to afford a higher mortgage. 

5. You are waiting for the pre-approval of a mortgage from your lender. 

6. You want to avoid paying high-interest rates.

What are the Advantages and Disadvantages of Rent to Own? 

Rent to own is a new homeownership concept in Kenya that has taken the market by storm. It can provide a simple way to own a home, and if you play your cards right, it can save you money. 

But with many homeownership paths to take, you should get the hang of the pros and cons and put them on a scale before deciding on rent to own. 

Advantages 

1. Your down payment is spread across months or years, freeing you from spending much on a single investment. 

2. You get time to build your credit score to qualify for a higher mortgage. 

3. You get a house at the current market value instead of future value when you complete the buying process and the property has appreciated. 

4. You get to build equity as a portion of your rent goes towards your homeownership. 

5. You don't have to buy the house if you sign a lease option contract. 

6. You move into your new house immediately.

Disadvantages

1. You relinquish all the money you paid towards the down payment if you don't buy the house. 

2. You will shoulder most homeownership costs like maintenance and insurance. 

3. You can lose the house if the seller cancels the agreement or gets foreclosure on the property. 

4. If you sign a lease purchase option, you risk paying high penalties and legal fees if you want out of the contract. 

How the Rent-to-Own Process Works

Finding rent-to-own properties will take some time as it is still a relatively new concept in Kenya. Few real estate companies offer this option, and you will face stiff competition from buyers with ready cash or preapproved mortgage. But once you find one, the process can be simple. 

Finding a Rent-to-Own House 

Some real estate agencies and financial institutions such as banks and SACCOs offer rent-to-own properties. The easiest way to find such properties is by browsing online listings, talking to your bank, or approaching a housing agency and asking for such an option. 

Finding a direct seller of such properties will be challenging as most will hire a real estate agent to protect themselves and leave the heavy lifting to the experts. 

Understand The Contract 

Once you find a rent-to-own property, you should hire a real estate lawyer to help you along the process. Unlike the outright homeownership process of buying a ready house in cash, this path will require legal representation to ensure you get a deal that favours you. 

Here are eight things you should lock down before moving to a new house on a rent-to-own basis. 

• Your options: Are you signing a contract that obligates you to purchase the house. The agreement you choose will be determined by how much you want the property, how certain you're you will raise the fund to buy the house, and the seller’s terms. Choose the option you can afford. 

• The Option Fee: Discuss how much you will pay extra in rent every month and ensure the contract says it'll be deducted from the house's price when the lease is up. 

• The Rent: Agree on a fixed rent with the seller before moving into the new house and signing a lease. This will cushion you in the long-term when rent prices in your location go up.

• The Timeframe: Determine the duration you will be making payments for and the deadline. 

• The Buying Price: Lockdown on the buying price at current market value, especially if your research suggests home prices will appreciate by the time your lease expires. 

• Taxes and Ownership: Perform due diligence to ascertain the seller has paid all the property taxes, they're the rightful owners of the property, and haven't put the house as collateral for any loans. 

• Maintenance and Insurance: Who will be responsible for paying the repair fees and the insurance premium before you take complete ownership? Your contract should stipulate this; however, in most cases, it will be you.

• The Legal Implications: What happens when you or the seller violate the contract? When you can't afford the house, or the seller changes their mind? You should have a favorable clause that will prevent you from incurring major losses. 

Buying The House 

Once you and your lawyer have gone through the contract and are confident you can hold your end of the deal, you can start the buying process. The process will typically begin after you move into your new house and pay your first month's rent plus the rent credit. As you wait for the lease to expire, you explore ways you plan to finance the purchase. 

There are different ways to fund this homeownership path: 

1. Get a Mortgage: Once you have locked down on the house, you can start discussing with different lenders and find a mortgage loan you can afford. Since you will be already paying monthly payments, you can increase your chances as moneylenders will see how committed you are. 

2. Invest and Save: You can invest in short-term vehicles with good returns to generate more income to fund your purchase. When doing this, you'd want to avoid high-risk investments that could lead to unexpected losses that might interrupt your homeownership goal. 

3. Liquidate: The lease period can give you ample time to sell some of your assets at market value and raise the money to complete the process. If you are invested in long-term schemes, you will also have time to wait for them to mature and get your money. 

4. Income: Since you will pay more in rent, you should consider increasing your income channels. Investing in income-generating schemes or developing a passive income strategy might work for you. 

Pitfalls to Avoid When Renting to Own 

As with any other route, rent-to-own properties require conducting enough research and being on alert for any misgivings that can lead to financial and legal disputes. To avoid future losses, avoid these pitfalls. 

Not Doing a Valuation: Before committing to a house and signing a contract, hire an appraiser to perform the property valuation so that you don't pay above the home's market value. 

Trusting the Seller: Thoroughly research the seller to ensure they own the property, have no history of foreclosure, and have no standing court orders against them or their building. 

Property Inspection: Ensure you conduct a property inspection to confirm the seller adhered to all build codes and laws. Ask for local government certifications and check if the house has any outstanding utility bills. 

Understand the Contract: Before signing, ensure you understand the contract and its legal implications. For instance, you might want to avoid a lease-purchase agreement if you are not sure you will get preapproved for a mortgage when the lease expires. 

Closing Costs: You will still have to shoulder most of the closing fees and additional costs when you own the house. You will also pay a relatively high lawyer and/or real estate agent fees as you will have to hire one at the beginning and the end of the process. Ensure you factor this into your budget. 

WRAPPING UP 

Rent-to-own properties offer an easy way to homeownership, give you time to test the new neighbourhood before committing, and carry significant risks as outlined. Ensure you get help from experts to guide you through the process, and don't sign contracts that favour the seller more. 

Rushing into a rent to own homes might lead to financial losses. If unsure you could raise funds to complete a purchase, look at other homeownership routes available or consider renting until you are ready. 

Read Also: Renting or Homeownership: How Do You Decide?