I have been renting property for more than a decade in the UAE. Although I currently don’t have enough money to put a down payment on a property, I am keen to know more about rent-to-buy schemes in this market.
Do such schemes come at a premium compared with the market price and how long do you have to rent before you can own the property? What are the pros and cons of rent-to-own schemes?
If I change my mind midway through the contract and decide to opt out of the scheme, will I be penalised by the developer? MM, Dubai
Renting in Dubai is an excellent way of sampling the lifestyle that the city has to offer without necessarily having to fully commit to putting down roots at that particular time.
Renting long-term, however, does not make financial sense. The longer a person rents, the more out of pocket they will become. Of course, house price inflation/deflation will also add to the mix, but whatever happens to the property market, you will always have an asset that has value and will bring some sort of financial return when it is sold.
Rent-to-own schemes have emerged over the past few years and were mainly brought about by developers who wish to sell their ready stock. This aids buyers by allowing them to live in the property by paying rent for a period of time, which ultimately will act as a deposit towards the property purchase.
Once 20 per cent of the property’s value has been reached, the tenant can then finalise the purchase by arranging a mortgage for the remaining amount.
Rent-to-own schemes have proved popular for some individuals who want to live in a property with the aim of owning it one day, but are not able to raise the deposit amount needed in order for them to finance the purchase with the mortgage.
A contract is drawn up to facilitate the rent-to-own purchase by fixing a selling price, then the rental amount and finally the term. Typically, the rental amount is agreed for a period of two to three or more years. This amount is typically slightly higher than the rent for the same property in the general market. The money accrues over the period of the set term.
Once the mortgage deposit amount or set term has been reached, the tenant has the choice of either proceeding with the purchase, using the deposit now accrued by arranging mortgage finance for the remaining 80 per cent, or not going further.
Most rent-to-own contracts give the buyer the option of walking away from the deal at the end of the term, but the deposit monies are forfeited to the seller/landlord. For purchasers wishing to cancel before the expiry of the term, financial penalties are in force, much like in any rental contract.
There are pros and cons to this scheme for both buyers and sellers. For sellers, one key positive is that developers can sell their inventory quicker and fix the selling price at the start of the scheme. However, there is a risk that buyers won't stay the full course, especially in a market where prices are falling, so the sale is not concluded. Cash flow can also be a problem for sellers.
For buyers, they get to move into a property that they are only part paying, without the immediate need to pay the whole deposit or 100 per cent of the sale price, and they remain within the protection of the rental laws within the initial period.
But the rent they pay is often much higher than the market rate in order to reach the deposit amount quickly and if the buyer decides to cancel the contract, all monies paid will be forfeited.
Rent-to-own schemes are successful but only in a stable market. By this, I mean neither rising nor falling. When the market is in decline, tenants/buyers will eventually feel they are paying too much for the property by the end of the term and in a rising market, the seller will feel they are selling too cheaply, so deals often collapse.
Mario Volpi is the sales and leasing manager at Engel & Volkers. He has worked in the property sector for more than 35 years in London and Dubai. The opinions expressed do not constitute legal advice and are provided for information only. Please send any questions to email@example.com