The fine print of rent-to-own schemes

The fine print of rent-to-own schemesImage Credit: Supplied

With high property rents and real estate sale transactions progressing slowly, most developers in Dubai are flooding the market with offers such as smaller down payments and extended installments schemes to encourage buyers, especially mid-bracket salaried individuals and families.

Other developers have recently reintroduced the rent-to-own (RTO) option into the market. For example, the government-backed Dubai South (formerly Dubai World Central) announced RTO schemes will be offered at The Villages project. Dubai South is an emerging location that is projected to be home to around one million people. The Dh25-billion mixed-use development will create five community-based villages offering as many as 20,000 homes.

The first phase of this development would be ready by 2019, although the developer has not yet revealed the prices of the properties.

Payment options

''[We want] to make The Villages available to most people who live in the Dubai South area,'' says Mohammed Al Awadhi, Vice President, Real Estate of Dubai South. ''RTO will allow professionals working in Dubai South to accommodate their families in The Villages. ''If tenants avail of this option, a portion of the monthly rent will be counted towards the property's down payment.''

Dounia Fadi, CEO of Elysian Real Estate, says mortgage is the most accessible option in the market, but borrowers need to have a good amount of cash for the down payment. Moreover, flexible payment plans have been introduced that allow buyers to pay off the property up to three years after handover, says Fadi.

''However, I would certainly encourage RTO to grow in the market because it has plenty of benefits for both the tenant/buyer and the developer,'' says Fadi. ''The property can be potentially owned with [part of] the rent going towards the sale price. For the developer, I would say it gives an incredible increased cash flow. Moreover, knowing that Dubai's rents are considerably too high and take a huge portion of everyone's pay cheque, I can see this method succeed in this market.''

Mario Volpi, Head of Projects at Asteco, agrees RTO offers numerous benefits to both tenants and developers.

''Tenants have an opportunity to try before they buy, where they get to experience the community before taking that first step onto the property ladder,'' says Volpi. ''The reduced risk and the opportunity to save a deposit are also important factors, particularly against a backdrop of increased living costs.''

For developers, it is an opportunity to target a larger market segment and generate more sales. From this standpoint, the scheme is popular for developers with several vacant units.

''The scheme was available in the early 2000s and has been adopted by several major developers throughout the past decade,'' says Volpi. ''It was perhaps most prevalent after the crash in 2008 as a means of re-establishing confidence with buyers and investors. In the correct environment, it is useful for increasing buyer confidence and maximising sales. It offers an alternative method to owning a home when a large deposit is unattainable.''

RTO contract

In RTO, part of the rent is set aside as down payment on the property, but the contract element could vary from property to property based on mutual agreement between the owner and the tenant. The scheme has been adopted by some developers in Dubai's primary market, notably Emaar for The Greens, GGICO and recently Dubai South, according to Kalpesh Sampat, Director at SPF Realty. However, while it has been available in the primary market, Sampat claims only SPF Realty is actively promoting the scheme in the secondary market.

''We have been advertising and marketing RTO for over a year now,'' he says. ''Generally, a tenant has the option to purchase the property within a predefined timeline and apply a specified percentage of the rent to the agreed purchase price.''

Normally it is 75 per cent of rent paid in first year and 50 per cent in second year that will be applied towards the sale price. At the end of the lease period, which is usually 12-24 months, the tenant should either arrange a mortgage to exercise the option to buy the property or exit from the option.

However, in some cases, if both parties agree, the buyer can have more than two years to arrange finance or decide to buy, says Sampat.

There is also an option fee charged to the tenant availing of an RTO contract. Sampat says an option fee can vary from 0-5 per cent of the sale price as agreed by both parties. If a tenant does not exercise the option to buy the property, the option fee would be applied, while if it is the owner who exits the RTO contract, the owner will have to pay the tenant the option fee. The penalty on both sides is applicable only in the secondary market, says Sampat, while in other markets such fees depend on mutual agreement by both parties.

For property owners, Sampat advises to consider RTO for vacant or rented property, as it allows sellers to get a relatively higher price than cash or conventional finance buyers. Moreover, the scheme allows sellers to access a larger segment of homebuyers and earn income instead of accruing costs keeping the property vacant while waiting for a buyer. Tenants and buyers also tend to maintain the property well.

From a tenant's point of view, RTO is a good option if home financing is not immediately available. It also allows tenants to negotiate and lock in a sale price.

Did you know that Dubai's developers make a case with sub-Dh1,000 per square foot

Source: Hina Navin, Special to Property Weekly


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