Avoiding the 5 Most Common Rent-to-Own Mistakes

Rent-to-Own has not yet become a popular method to purchase property in Sri Lanka. In fact, very few Sri Lankans do understand how it works. For a majority of them, Sri Lankan real estate industry consists of very basic types of transactions that are grossly categorised down to buying, selling and renting out.

Sri Lankans very rarely rent their property with the purpose of selling them. If they want to sell they sell them. They never waste time in renting them to the prospective buyer. So it is with the tenants. A Sri Lankan family moving in for rent with a legally binding contract that would enable them to purchase the rented property is a scenario that is unheard of. They go to rent and they start saving – to build a house or buy a house somewhere.  

But this does not mean Rent-to-Own should be ignored in Sri Lankan real estate industry. The method has its own advantages – along with its infamous pitfalls. Today we take a glance at how it works and – if you are interested in putting it in to action – the mistakes you may happen to make.  

Let us for a moment assume you want to buy a house in Colombo. You find a nice roomy abode in a friendly neighbourhood and inquire about it from the owner. His position is bit different. That is, he is ready to sell it to you after you live on rent in that place for a year.

You have to pay him a non-redeemable “option” price at the start. This “option” price gives you the right to purchase the property at the end of twelve months you lived on rent. But it is only a right. Not an obligation. That means you have the liberty to decide whether you buy the place or not. If you are buying, the option price would be deducted from the selling price. If not, the option price would not be given back to you.

The monthly rent would be bit higher than normal rates in the area. The difference i.e. what you pay in extra, would be deducted from the final selling price at the end of twelve months.     

So the obvious question. Why work yourselves in to such a complicated situation rather than closing the deal then and there? What is in it to him? What is in it to you?

Yes. For the seller he creates a cash inflow for a period of twelve months. At the end of that period, if the buyer decides to purchase the property, the Seller’s primary objective is successfully met. If the Buyer refuses, then the Seller still wins. He had received a much higher income; option price plus a high monthly rent.

For the Buyer, he gets a chance to save up, accumulating his funds to meet the purchase transaction at the end of twelve months. Further he gets a chance to assess the property he is about to buy and also the surrounding environment in greater detail.

But the system has its drawbacks. Loopholes. And in countries where the thing is common it is rife with predatory property owners. They never sell you the property. They make off with your option price and the rent. How can this happen to you here in Sri Lanka if you take the chance to sign a Rent-to-Own contract? Here is what to avoid.

Signing the contract without hiring a lawyer

In a Rent-to-Own situation it is usually the Seller who prepares the legal contract. So it is obvious he can manipulate the provisions in the said contract to his own advantage. Being the Buyer you hire a lawyer from your side to avert this and let him deal with the Seller’s lawyer. This increases effective communication between the two parties and enhances transparency of the transaction.

Signing the contract without sound understanding of the said contract

Hiring a lawyer is not a panacea. As the buyer you should also have a clear understanding of what you are agreeing to. Maybe there is a clause indicating if you delay your rent, the contract becomes null and void. A lawyer cannot keep reminding you the rent due each month. A lawyer’s work is finished after the signing of the contract. You should take care you act accordingly afterwards.    

Signing the contract without securing the services of an assessor

Before deciding to live in that house and later purchase it you should better send an experienced assessor to value the place over. This helps you get a clear idea about the real value of the property that you are going to rent and buy. It prevents you from paying an unreasonably higher price than you should. An assessor’s report also increases your bargaining power when you negotiate with the Seller.

Signing the contract without acquiring an escrow service

Escrow Service is offered by a third party who acts as a go between you and the seller. They keep records of both parties in their hands until the deal comes to a close. This ensures genuineness of the transaction and protects the buyer from fraudsters.

Signing the contract without checking the title

The most obvious and most overlooked. Always keep in mind that this is no ordinary renting procedure. At the end of a particular period you are going to buy this property. If some legal issue comes up after all these expenses all your efforts would be in vain. There can be undisclosed owners to the property. Check on them. Always be on your guard.

Finally, it is prudent to keep in mind that Sri Lankan Real Estate Industry has yet to go a long way in Rent-to-Own contracts. It is still largely a rural country, and the buying and selling of real estate normally happen in simple single transactions. However it can be safely mentioned that there can be increased interest in this purchase method among Sri Lankans when economy thrives.     

We wish you success in your Rent-to-Own transactions!