By Louise Fourie | Principal, Africa Estate
Rent-to-buy can give you time. It cannot give you affordability. We get a lot of calls from people looking for rent-to-buy properties, and most start the same way: "I can't get a bond, so I'm looking for rent-to-buy." But rent-to-buy is not a way around the bank. If you cannot afford the property, or have no realistic way of qualifying later, renting it first does not solve the problem. This page tells you in about a minute whether it can work for you.
01 WHAT IS RENT-TO-BUY?
You rent the property for an agreed period, with a written right to buy it later. The key word is later: at the end you must still be able to pay the price.
02 WHAT WILL IT COST YOU?
Rent, usually an upfront option fee or deposit, and possibly extra amounts towards the purchase. You can pay for 24 months and still not own the house.
03 WHY WOULD A SELLER WAIT?
Another buyer can buy today. The seller takes the property off the market and a risk on you. That only makes sense if waiting pays the seller too.
04 WHEN CAN IT WORK?
When you can afford the property, know exactly why you cannot qualify today, and can fix it within 12 to 24 months.
Who wins and who loses
- The buyer wins when the problem is temporary, the time is used well, and the purchase goes through.
- The buyer loses when they pay extra for months and still do not qualify.
- The seller wins with good rent or compensation, and a sale at the end.
- The seller loses when the property is tied up for years by someone who can never buy it.
The Reality Check
Answer honestly, yes or no:
- Can you afford this property every month, comfortably?
- Do you know exactly why the bank declined you?
- Can you fix that within 12 to 24 months?
- Do you have money available upfront?
- What are you offering the seller in return for waiting?
Three NOs? Then rent-to-buy is not your next step. Start with the reason your bond was declined, and come back when that is fixed.
Is rent-to-buy legal in South Africa?
Yes, but it is not a separate legal product. It is built from agreements the law already knows: a lease, a right to buy later, or a sale paid off in instalments. How it is written decides which laws apply.
A sale of land must be in writing and signed by both parties (Alienation of Land Act, section 2). If the price of a home is paid in more than two instalments over more than a year, it is an instalment sale under Chapter II of that Act: the seller must have the contract recorded at the Deeds Office (section 20), and a buyer who has paid half the price can demand transfer (section 27). If a fee or interest is charged on the part of the price that is paid later, the National Credit Act can apply as well (section 8(4)(f)). Have an attorney draw up the agreement.
Frequently asked questions
Do I still need to qualify for a bond? In most cases, yes. At the end of the rental period the price must be paid, and for most buyers that means a home loan. Rent-to-buy postpones the bank, it does not replace it.
Does my rent come off the purchase price? Only if the written agreement says so, and only the amount it says. Ordinary rent is payment for living in the house, not a deposit.
Do I need a deposit? Almost always. An upfront option fee or deposit is usually what makes it worth the seller's while to wait for you.
What happens if I still cannot get finance? That depends on the agreement, but you can lose the option fee and extra amounts you paid, and you do not own the property. Read this part of any contract twice.
Why would a seller agree to rent-to-buy? Only when waiting pays: rental income for a period, a property that is hard to sell, or a price and terms that make the wait worthwhile.
Passed the Reality Check?
If you answered yes to all five, rent-to-buy may be a real option and we would like to hear from you. Contact Africa Estate and tell us your answers.
Read more in this series
- Bond Declined: Why Rent-to-Buy May Not Solve the Problem
- Rent-to-Buy for Sellers: Why Would You Agree?
- Rent-to-Buy vs Instalment Sale: What Is the Difference?
- Rent-to-Buy and the National Credit Act: When Does It Apply?
- Rent-to-Buy: What If You Still Don't Qualify for a Bond?
Sources: Alienation of Land Act 68 of 1981, sections 1, 2, 20 and 27; National Credit Act 34 of 2005, section 8(4)(f). This article is general information, not legal or financial advice.
Tags:rent-to-buy · rent-to-own · bond-declined · first-time-buyers · instalment-sale · alienation-of-land-act · national-credit-act
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