15/06/2021
How Does Rent-to-Own Work in the Philippines?
Many real estate properties are emerging in the market today, which makes it difficult for sellers to find potential buyers for their property. There are also times when cash-strapped buyers, who take out a mortgage, find it challenging to secure a loan for one reason or another. Thus, failing to purchase the home they want.
In todayβs tough market, engaging in a rent-to-own scheme may be the best option for both buyers and sellers.
Rent-to-own (RTO), or lease-to-buy, is an agreement that gives an individual the option of purchasing a leased property from its owner within a specified period of time. This simply means that a buyer is allowed to rent a home with an option to purchase it during the rental period or until the term of the loan expires.
But how does the rent-to-own scheme work in the Philippines exactly?
At the start of the arrangement, both parties will have to specify the monthly rental, purchase date, the sales price, and other clauses such as the interest rate. Once they have agreed on the terms, a contract is drafted and signed.
Unlike traditional financing, however, rent-to-own is owner financed, which means that the owner is the one offering financing to buyers. As a result, lessees pay rent that is slightly above market rate. This is because a portion of it will go to the down payment for the property in the event that the lessee decides to purchase it. In such case, he or she must arrange for financing, either through a bank or other lending institution, to pay for the remaining balance. If the lessee decides to walk away, all paid rent stays with the lessor, which is hisβ or hersβ incentive for taking the home off the market while it was being rented.
In terms of the sales price, bear in mind that whatever price is stipulated in the contract is final and cannot be altered regardless of any increase or decrease in the propertyβs value during the lease period. So before signing any contract, make sure you fully understand what you are agreeing to.
What are the potential pitfalls?
For buyers, a downside is if they choose not to purchase, all paid rents will be forfeited. Another is that if the home value depreciates during the rental period, the renter would end up having to pay for a property that is way above market value. A third disadvantage is if the lessee falls behind rent, this may get him or her evicted and would lose the down payment and all previously paid rent.
And because a rent-to-own agreement is tricky and unusual, it would help the lessee and lessor to review RA 9161 or the βRental Reform Act of 2002β to fully understand the laws covering RTOs in the Philippines and avoid any unheard-of violations.
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