Everything You Should Know About Rent-to-Own Properties

The popular and conventional way to own a property is to either build it or to buy it outright. But rent-to-own is another way to acquire properties and it is gaining traction in Nigeria.

If you have ever felt overwhelmed by the traditional home-buying process, you’re not alone. With the rising price of properties and strict mortgage requirements, many aspiring home or property owners are turning to rent-to-own schemes as a viable and feasible alternative. In this article, you’ll learn everything you need to know about rent-to-own properties.

Common Ways Properties Can Be Owned in Nigeria

In Nigeria, you can own properties through the following means:

1. Outright Purchase: Buying a property outright involves paying the full price upfront. However, this method of acquiring property can be financially burdensome for many.

2. Mortgage Financing: This traditional method of acquiring properties requires securing a loan from a bank or financial institution. Oftentimes, it requires a substantial down payment and good credit history.

3. Cooperative Societies: Members of a cooperative society can pool resources together in order to purchase properties collectively.

4. Rent-to-Own Schemes: This is the innovative approach that allows tenants to rent a property with the option to purchase it later.

What is Rent-to-Own?

Rent-to-own enables potential buyers to lease a property while having the option to purchase it later. In a rent-to-own agreement, you agree to rent the property for a designated period, with the choice to buy it before the lease expires.

How Does Rent-to-Own Work?

When you enter a rent-to-own agreement, you and the seller will agree on a set price for the house. This is a big deal because, no matter what happens to the home’s value later on, you’ll have the option to buy it for that agreed-upon price.

However, it is important to note that sometimes these prices might be a bit higher than current market rates. Why? Because it’s a way to factor in potential increases in property values. If the home appreciates more than expected, you’ll benefit from that increase. On the other side, if the value drops, you have the choice to walk away without any obligation to buy.

When the time comes for you to purchase the home, you’ll typically need to apply for a mortgage. As part of this arrangement, buyers usually pay an upfront option premium or spread it out in smaller increments along with their monthly rent payments. This option premium can be as much as 5% of the final purchase price. Keep in mind that this fee is non-refundable, but it can be applied toward your down payment when you decide to buy.

The contract will also outline how much your monthly rent will be and how much extra you’ll pay each month. That extra amount is often credited toward the final purchase price of the home, which means you won’t have to come up with as much cash when it’s time to buy.

However, remember that this additional rent is also non-refundable. It serves as compensation for the seller, who agrees not to sell the property to anyone else while your rental agreement is active. You must ensure your contract clearly states who is responsible for maintenance during your rental period. This detail is crucial because it helps avoid any misunderstandings down the line.

The Significance of Rent-to-Own

Rent-to-own schemes provide significant benefits that address the challenges of conventional homeownership. Some of these benefits are:

1. Accessibility

These arrangements allow individuals who may struggle with large down payments or poor credit histories to gradually work towards owning a home. A portion of the rent paid contributes toward the purchase price, effectively building equity over time.

2. Financial Flexibility

Tenants can improve their financial standing and credit scores during the rental period, making it easier to secure financing when they’re ready to buy.

Stability and Security: Rent-to-own agreements often lock in purchase prices, protecting tenants from market fluctuations that could increase property costs during their rental term.

3. Immediate Occupancy

Unlike traditional purchasing methods that may require lengthy processes, rent-to-own allows tenants to move into their potential future homes right away.

The Potential Cons of Rent-to-Own

Some of the potential cons of the rent-to-own scheme are:

1. The Risk of Forfeiting Your Money

One key thing to keep in mind with rent-to-own agreements is that if you decide not to buy the home, you could lose all the extra money you’ve paid. Some sellers might even make it challenging for you to complete the purchase. Some may have a hidden agenda to pocket your investment. For this reason, it’s crucial to understand this risk before committing.

2. Slow Progress

You might have plans to improve your credit score or boost your income to qualify for a loan by the end of your rental period, but life doesn’t always go as planned. If things don’t work out as you hoped, you could find yourself in a tough spot when it’s time to buy. Being aware of this potential setback is essential before starting a rent-to-own agreement.

3. Limited Control over the Property

Since you don’t actually own the property yet, your control over it is limited. For instance, if your landlord stops making mortgage payments, the property could go into foreclosure, jeopardizing your investment. It’s important that your agreement addresses these scenarios to protect your interests.

4. Falling Prices

Home prices can fluctuate, and if they fall, you might not be able to negotiate a lower purchase price. This situation can leave you with a tough choice: either to forfeit your option money or proceed with buying the house at a higher price. If your lender won’t approve a larger loan, you may need to come up with additional cash for the down payment at closing.

5. Late Payments Hurt

Depending on your agreement, late rent payments could cost you the right to purchase the home along with all those extra payments you’ve made. In some cases, while you might retain your option, any late payment won’t count toward your eventual purchase amount. This is why it is important to ensure you stay on top of your rent payments so as to avoid losing out.

6. Hidden Problems in the House or Property

There may be hidden problems with the property that only come to light when you’re ready to buy, such as title issues. You must treat a rent-to-own purchase like a traditional home purchase. This means you have to get an inspection and conduct a title search before finalizing anything. This proactive approach can save you from unexpected headaches down the road.

Final Thoughts

Rent-to-own properties are an appealing solution for many Nigerians seeking to own homes and real estate properties without the immediate financial strain of traditional methods. If you have exploited this option to purchase a home or real estate property, we would love to hear your experience in the comments.