Rent –to- Own Schemes
Developers are once again giving them some serious thought
Mohanad Alwadiya
Managing Director
Harbor Real Estate
When times are tough, developers would always bring out the faithful standby, rent-to-own schemes, to try and drum up sales. But with the local property market showing some signs of prices stability, these schemes are once again being given a serious look-in.
Developers, particularly those owning single high-rise developments with anywhere between 60% and 80% occupancy, are said to be giving them some serious thought. Their thinking goes somewhere along these lines – since they already have sizable tenant base for the properties, it would be easier to get the tenants thinking about actually owning the property. Typically, at today’s property values, buyers are able to purchase such property after three years.
To convince them, the developers can always point out the firming up of property values in key locations. “ if some of these tenants are actually considering investment, it’s best to make them commit now rather than wait and see a further firming up’’ said a sales manager of a real estate developer.
But is the process as clear-cut as that? Industry sources are unanimous in saying that transparency has to run through-out the entire process. “The scheme must offer true value for money in order for potential buyers to consider it” said Mohanad Alwadiya, Managing Director at Harbor Real Estate, a company offering such schemes in some of the developments they manage. The monthly rental value and final sale price must be realistic and in line with market rates.
“Some schemes that demanded a premium proved to be ineffective. Buyers seek real value and are still nervous about the market performance in the next two to three years. Schemes allow buyers to evaluate the opportunity at hand without having to make an immediate commitment. They also allow them to assess their finances and test the property and community they will live in before making a decision” he added.
Interestingly, key developments, especially the flagship high-rises in Al Reem Island, Abu Dhabi, seem to have their rent – to- own programmes sorted out better than their Dubai counterparts.
“it may be related to the perceptions about the quality of the build and locations being superior. Buyers have a strong belief that these investments are better protected against property market fluctuations” said a real estate consultant in Abu Dhabi.
That is not to say that Dubai has not had rent-to-own initiatives that hit the mark. The lakes community, which started out as a purely rental development, has had a spectacular response when the developer offered units on rent-to-own basics. But all that happened when the property market was still at its peak.
For developers to successfully close deals at this time, they need to be realistic about their offers. Alwadiya cited four factors that give prospective buyers pause, “clients are finding it increasingly difficult to source mortgages in time to meet their purchase deadlines. Many are wondering if they should buy or rent during the current economic climate, while others are unsure if they will like the lifestyle in a project they want to buy into after they purchase a property there.”
“Many clients, especially expatriates, would rather save the money they spend on rent’ he added.
Now, more than ever, developers and agencies marketing rent – to – own schemes need to hone their presentation skills to convince tenants to buy.
THE RENT – TO – OWN SCHEME EXPLAINED
The rent –to – own period would be agreed upon in advance. The buyer and seller would agree to a yearly payment plan which is the equivalent of the current market prices for rentals in the area the property are located.
At any time during the rent –to- own period, the buyer would have the option to purchase the property at the agreed price, with the amount already paid in rent deducted from the price. The balance of the agreement will be settled, either at the end of the period or earlier, when the buyer’s mortgage is approved or if the buyer chooses to pay in full by cash.
A transparent, realistic and clear-cut scheme takes the pressure out of the situation by giving clients the options to rent the property within a set period of time, before making a decision to purchase. Such schemes do not have any hidden charges or require down payment, and will not include any penalties if the client decides to opt out.