What are rent-to-buy houses, and how do they differ from installment houses?
Rent-to-buy houses are a housing deal where the seller allows a tenant to rent their property for a fixed period of time, usually 2 to 3 years, before fulfilling the obligation to purchase at the agreed price. This is usually done to allow the buyer time to save towards a deposit or to clear and rectify credit score problems.
Instalment sale houses are sales of houses where the owner allows the buyer to purchase their property for a set price paid in monthly installments over a fixed period of time – usually 5 to 6 years. There is no bank bond for this type of sale, and usually, no estate agents are involved. Needless to say, the practice is risky for both the buyer and seller, and yet an increasing number of buyers are actively seeking this option.
For many average South Africans, the rent-to-buy option is often misinterpreted, and what they are really seeking is an installment sale property, allowing them to bypass the banking system.
What are the risks of Rent To Buy Houses?
There are a number of risks involved for both buyers and sellers of rent-to-buy houses, although the deals are usually covered in contracts that are formally signed and sealed by qualified estate agents and lawyers.
Risks associated with rent-to-buy houses include fluctuations in the current housing market. Prices are generally set at the date of the initial contract, while the actual sale and transfer of the property only takes place 2 years or more later. Housing prices may rise or drop dramatically, causing heavy losses/ gains for either the seller or the buyer.
In many instances, the insincere buyer may be looking to merely feel the house and the area out before they commit themselves to the actual sale. Even though there is a legally binding contract in that makes the buyer legally bound to continue with the sale, the chances of enforcing the contract legally are usually very slim. House sellers may find that they have to once again place their house on the market and also pay out for damages and repairs that may have occurred due to negligent tenants.
The Risks with Instalment Houses
Instalment house sales are extremely high risk for both the seller and the buyer and should be avoided at all costs.
Instalment sales usually result from a prospective buyer approaching a seller and offering to buy the house by paying the person’s bond or similar for the next 5 years.
Sellers are often experiencing financial difficulty, and so this is often an attractive proposition to them. However, many buyers of this type are unable to obtain bank financing due to poor credit records.
The 2nd huge danger is the lack of enforceable contracts, or where contracts are indeed in place, the ability of one or the other of the parties to use an escape clause in the contract to cancel the deal. This could result in heavy financial loss for the seller or buyer. Imagine paying 80% of the purchase price, then defaulting once, and so the seller cancels the deal and you lose the house and the money already paid.
Another huge concern is that in these types of sales, the purchase price of the property is set at the beginning of the period, while the actual transfer of the property takes place at the end of the period, once the property has been paid in full. This allows for huge losses where property prices have changed dramatically for the better or worse. Additionally, just because the buyer has finished paying his portion of the contract price does not necessarily mean that the seller is legally entitled to sell the property. There I the possibility that the property is still bonded by the bank and that the seller has not fully paid the bank.
Of course, municipal accounts also feature in the equation as unpaid accounts need to be fully settled before any transfer of ownership may take place.
There are only 2 reasons that any prospective buyer would want to enter into a rent-to-buy house deal or an installment house deal:
- They wish to bypass the banking system and minimize interest payments
- They have poor credit records and are unable to obtain the necessary funding through financial institutions.
The Solution.
For those with a poor credit score, it is highly recommended that you spend the next year ensuring that your debt is paid on time and that all of your accounts are up to date. This will improve your credit score, and once your credit score is rectified, you will be able to purchase a house using bank finance. Bank finance is the safest and best option for buying a house.
If you are hoping to eliminate or pay as little interest as possible, then have you heard about access bonds? An access bond is a home loan where you have a minimum monthly payment, like any normal bond. However, you are able to make additional or extra payments into the bond account. This reduces your principal debt and your interest payable over time.
Using an access bond, it is quite possible to pay your house off within a period of 6 years or even less.
Additionally, the extra money paid into your bond may also be withdrawn should you find that you urgently need extra money for an emergency or even another project. In a way, it is almost like having an extra savings account.
