Housing Finance

What Nigerians need to know about the rent-to-own concept

Most Nigerians probably haven’t heard about rent-to-own housing. Unlike in developed countries, this arrangement is pretty rare in Nigeria. While the concept is foreign to our current real estate investment legal framework, it is nevertheless important for us to discuss and understand this concept.

Rent-to-own is an alternative route to home-ownership for those who can’t obtain financing due to poor credit or because they don’t have enough money for a down payment (or both). The idea is that you rent a home for a certain period of time with the goal of buying the property at the end of your lease. If all goes according to plan, by then you’ll have repaired your credit and/or saved enough to secure a mortgage.

How rent-to-own works

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Rent-to-own agreements, also called lease-option agreements, can take many different forms.

The truth is there are very limited options for several individuals and families seeking to own properties. In order to encourage home ownership and real estate investment, there is the need to provide options that will make it easier for individuals to achieve their dreams of owning a property.

The normal pathway for a homeowner in Nigeria is to have cash and to purchase a property or to build. Access to mortgage is limited and those who are fortunate enough to secure one have to pay double digit interest rate that significantly increases their cost. The need for a more inclusive system is definitely creating the opportunity for some property developers to introduce innovative options that could attract buyers or off takers to their projects.

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The initial trend was to give their clients the opportunity to pay for land in installments. Another option some are now offering is the rent to own option.

Rent to own could also be referred to as a lease-option scheme that enables a purchaser to buy the property by installment. The buyer is allowed to rent the property for between one and three years with the option to buy the property outright at the end of the lease term subject to meeting some additional terms and conditions that are agreed upon at the inception of the agreement.

Most rent to own schemes target those who cannot meet the stringent lending conditions of the banks by giving them the opportunity to prepare themselves financially to buy a property later.

A typical rent to own agreement will include terms such as option money, purchase price and rent. The rent is calculated on a monthly basis and is usually higher than the normal rent of the property. There are two basic reasons for this. The first is the time value of money which makes paying for something by installment more expensive. And the second is the fact that most rent to own also factor in an amount that goes to defray part of the cost when it comes to the time for paying the final purchase price.

The option money is a deposit that is made at the inception to secure the lease option. It is normally a percentage of the purchase price and is similar to a down payment but usually lesser.

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The purchase price is normally determined at the beginning of the lease so that the buyer has a fair idea of the amount that he is expected to pay but this could also be left until the option is to be exercised. At that time, the current market price or higher could be used as the benchmark.

The first method is actually better for the purchaser since it prevents the seller from arbitrarily changing the price or in a rapidly appreciating real estate market, from paying a significantly higher purchase price.

The way these agreements are structured, the tenant is obligated to buy the property and if he or she fails to meet up with any condition of the agreement could lose all the deposit already made. The seller could approach the court to compel the buyer to fulfill his or her part of the deal. In some cases, the parties may agree to allow the right to pass subject to the payment of cost in addition to losing his or her option deposit.

At the agreed time, the buyer is expected to pay the purchase price in full either through mortgage or personal savings. If he or she is unable to meet up then the consequences are activated.

The terms and conditions that are standard in these transactions could be quite technical and as such it is recommended that you engage the services of a legal practitioner to help you navigate them before you sign.

While this may be an option for some, for several others the risk of losing money due to their inability to meet up with the various terms is simply not worth it.

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The major advantages that the rent to own scheme provides is that you can move into the property whilst getting your financial acts together. You can also lock in the purchase price in order to avoid significant price differential at a future date.

In our context, property developers that are using this scheme should also realise that they are taking significant risk since there are no specific legislation that back this scheme in Nigeria. Some of these arrangements will go sour. They should keep in mind the constraints of our legal system in the area of possession and enforcement of judgment.

Affa Dickson Acho

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