How does rent to own work in Dubai?

admin 13/12/2018 No Comments

How does rent to own work in Dubai?

If you’re living in Dubai, a major part of your income every month will go toward paying the rent. And for those going steady with the city and plan to stay long-term, buying a home is a smart investment, especially since your monthly loan repayments usually end up being cheaper than paying rent.

So, why don’t we all do it? Well, for one, not everyone can afford the sizeable down-payment (generally 25% of the property value, plus 8% in fees) on the home that the bank requires in order to finance the loan. And it’s estimated that about 70% of Dubai’s population actually falls right into that category.

That’s where rent-to-own schemes come in

[caption id="attachment_7789" align="alignnone" width="900"] Properstise for sale in Dubai[/caption]

It is an arrangement between an owner, who promises to sell their property to the tenant for a pre-determined price within a certain time frame. As part of the agreement, a percentage of the rent payment will be paid as a portion of the purchase price or the buyer’s closing costs associated with the transaction. In other words, the buyer basically rents the property for a specific amount of time before having bought /owning the property outright when the lease expires.

Rent-to-own has not gone mainstream in Dubai just yet, but the scheme is quickly gaining in popularity as an alternative for aspiring property owners who obviously like the fact that the rent paid on a home under the scheme is converted to equity, eventually resulting in them owning the property.

In theory, developers benefit too, because they get to sell their current ready-to-move-in stock of homes instead of having them sit on the market, driving down real-estate prices as supply remains high and demand is limited.

That said, however, rent-to-own properties are still not so easy to find. They don’t fit well into typical property listings for sale or rent. And risk-averse property developers generally prefer to get their hands on the large lump-sum that comes in the form of a down-payment, rather than the much smaller amount that would be coming in as a percentage of the monthly lease under a rent-to-own agreement.

Still, smaller developers are more likely to try and compete with each other to fill occupancy of their properties and are therefore also more likely to be more flexible. And since they’d be providing you with a road to owning your own property that you otherwise wouldn’t have, your lease on a rent-to-own arrangement (ranging anywhere between two and ten years in duration) would be higher than conventional rent or traditional monthly loan repayment/mortgage installments.

With that in mind, and if you do manage to find a rent-to-own scheme for an apartment or villa in Dubai that you would like to eventually call your own, you should be aware of what you might be looking at contractually.

Two potential types of rent-to-own lease agreements

With the option to purchase

This type of lease will require you to pay an “option fee” – a percentage of the property purchase price – in exchange for the right to purchase the home at a later date.

If you decide to do so, the owner/developer is required to sell it to you and apply the option fee to the purchase price. If you choose not to buy the property, you lose the option money.

With purchase agreement

Under this arrangement, everything is pretty much set in stone from the get-go. You and the property owner agree on a fixed purchase price or you come to an understanding that said price will be determined through an appraisal in the future. You also agree on the future closing date.

You should use the market to guide your decision on whether you go for a fixed price or a future appraisal price. In a rising market, opting for a fixed price will give you the opportunity to have equity in the home even before making the purchase. In all other market conditions, an appraisal at the time of purchase will ensure you don’t pay over market value.

Also, if you have credit repair work that needs to be completed, or if your financing is still a question mark, you should try to get a closing date that’s at least 12 months in the future.

Things to look out for/think about

Rememer, be mindful of all the terms and conditions in the contract.

Consider:b Who is responsible for the property during the time it’s being leased to you? You don’t officially own the property during the lease, so you don’t have all the control.

Or you might miss a payment – that also happens. Do you have terms in the contract addressing what the consequences might be? You want to avoid potentially losing all the extra money you have paid or losing the right to purchase.

You might decide that you want to sell the property to someone else while the rent-to-buy scheme is in place. Are you allowed to do this?

These are just some of the points you need to keep in mind before signing the contract.

Categories : REAL ESTATE