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Is rent-to-own units a good option for property buyers in Dubai?

Rent-to-own units have gained popularity in Dubai’s real estate market as a unique option for property buyers. In this blog post, we will critically evaluate whether rent-to-own units provide a good option for property buyers in Dubai. We will explore this arrangement’s potential benefits and drawbacks, considering aspects of property management and the overall real estate market.

Rent-to-own in Dubai is a unique property scheme allowing you to lease a unit with the option to purchase. Under this arrangement, your rental payments are the unit’s down payment. Governed by an agreement between you and the developer, both parties adhere to UAE laws as if in a regular tenancy contract during the specified rental period. This option, spanning up to 20 years, requires an upfront payment of about 5% or less, eliminating the need for a mortgage. While the rent may exceed market rates, the convenience appeals to those unable to save for a traditional deposit.

For Landlords (Sellers):

Pros

  • Attracting Buyers in a Challenging Market: It helps find interested buyers, especially when facing challenges in selling the property.
  • Avoiding Double Mortgage Payments: A viable option to avoid paying a double mortgage, especially if the landlord has purchased another house.
  • Savings on Maintenance: Long-term tenants taking care of the property can lead to savings on maintenance, even if the deal doesn’t materialize.

Cons

  • Limited Flexibility in Booming Markets: In booming real estate markets, the landlord may miss out on potential higher returns as exiting the contract becomes challenging.

For Tenants (Buyers):

Pros

  • Credit Score Improvement: Provides time for tenants with low credit scores to improve or build their credit.
  • Financial Flexibility for Low-Income Individuals: A viable solution for individuals with low income and insufficient reserves.
  • Rent Credits Toward Mortgage Down Payment: A portion of the rent contributes to the mortgage down payment, offering relief to aspiring homeowners.
  • Future Homeownership without Relocation Hassles: Allows tenants to live in a home they will eventually own, avoiding the hassle of moving.

Cons

  • Maintenance Responsibility: Unlike regular tenants, rent-to-own tenants bear responsibility for maintenance and repairs, though this becomes less significant with a firm buying decision.

The two available agreements are:

Possibility to Purchase Agreement:

  • Buyer pays an ‘option fee,’ a predetermined percentage of the purchase price.
  • Grants the right to buy the property at a later date.
  • Choosing not to proceed results in the loss of the option fee.
  • It provides flexibility for the buyer to decide on property ownership.

Purchase Agreement:

  • Terms are pre-negotiated between the buyer and developer.
  • Options include a fixed purchase price or determining the price through future valuation at an agreed date.
  • Ideal for buyers to be sure about their decision to purchase.

These agreements are legally recognized by the Dubai Land Department (DLD). The DLD has introduced a dedicated rent-to-own service on its portal, ensuring the registration of a specific title deed. This initiative establishes a robust legal framework, enhancing transparency and facilitating seamless transactions within the rent-to-own system.

Affordability

  • Increases chances of home ownership in Dubai with reasonable prices.
  • Eliminates the burden of a costly initial payment.

Capital Accumulation

  • Paying rentals serves as an indirect means of capital collection in manageable installments.

Trial Period

  • It enables you to experience the unit before committing to purchase.

Simplified Criteria

  • The scheme’s criteria and procedures are more straightforward than obtaining a traditional home loan.

Thorough Understanding of Agreement

Before signing the tenancy contract, ensure a comprehensive understanding of all clauses, rules, and conditions.

Critical Points in the Agreement Include:

  1. Market Price Changes: Be aware of how the property’s price may fluctuate with market changes.
  2. Title of Deed: Ensure you have access to the title deed throughout the entire contract period.
  3. Payment and Termination Clauses: Understand the specified timeframes for payments and termination clauses.
  4. Upfront Costs: Be cautious about potentially paying a higher upfront amount compared to non-rent-to-own properties.
  5. Mortgage Eligibility Check: If you decide to purchase the property, assess your eligibility for a mortgage to facilitate the buying process.

Individualized Conditions

Payment plans vary case by case, as they are tailored to the specific agreement between the developer and buyer.

Guidelines from DLD

The Dubai Land Department (DLD) provides guidelines and associated fees for registration, financing, transfer, and cancellation of rent-to-own contracts.

Tailored Solutions

Despite DLD guidelines, the schemes developed so far are individually crafted to meet the unique requirements of each case, ensuring flexibility and customization.

  1. Agreed Property Value: Clearly state the property value the buyer and developer decided upon.
  2. Lease Time Frame: Specify the duration of the lease contract, confirmed by both parties.
  3. Title of Deed Ownership: Ensure continuous ownership of the title deed throughout the contract duration.
  4. Exit Terms: Define the terms and conditions for exiting the contract.
  5. Repayment Penalty Clause: Include a penalty clause for defaulted repayments, specifying the consequences.
  6. Refundable Down Payment Percentage: Clearly outline the percentage of the down payment (if any) to be refunded in case of contract termination.
  7. Job Loss, Missed Repayments, or Mortgage Rejection Clause: Address potential scenarios like sudden job loss, missed repayments, or mortgage rejection at the time of purchase, particularly once the lease term concludes.
  8. Property Maintenance Terms: Clearly define responsibilities for property upkeep throughout the contract duration.

For Individuals:

  • A copy of the buying contract.
  • Copy of the Emirates ID.
  • For non-residents, a copy of a valid passport.

For Sole Establishments:

  • Copy of the trade license.
  • For the license owner, a copy of the valid Emirates ID and passport.
  • Power of attorney, if available.

For Limited Liability Companies:

  • Copy of the valid trade license.
  • For the license owner, a copy of the valid Emirates ID and passport.
  • Power of attorney, if available.
  • Copy the company’s Memorandum of Association and appendices (legally translated into Arabic).
  • A copy of the shareholder certificate.

For Foreign/GCC Companies:

  • Copy of the valid trade license.
  • For the license owner, a copy of the valid Emirates ID and passport.
  • Power of attorney, if available.
  • Copy of the company’s Memorandum of Association and its appendices (legally translated into Arabic) and authenticated by the Ministry of Foreign Affairs.
  • A copy of the shareholder certificate.
  • No Objection Certificate from the Free Zone areas, with one-year validity (for foreign companies).
  1. Access the DLD Website: Visit the Dubai Land Department (DLD) website.
  2. Select “Register for -Rent-to-Own.”: Utilize the Contract service on the DLD website and choose “Register for Rent-to-Own.”
  3. Provide Financing Details: Enter details regarding the financing entity and the amount.
  4. Fill in Required Information: Complete the necessary information as prompted.
  5. Choose Payment Method: Select your preferred payment method.
  6. Attach Required Documents: Upload and attach the essential documents per the outlined requirements.
  7. Submit Application Online: Complete the process by applying online.
  8. Receive Confirmation via Email: The renter will receive the confirmation document through email.

Following these simple steps, you can initiate and complete the application process for the rent-to-own scheme in Dubai.

Transaction Fees

  • 0.25% of the rent amount.

Sale Price Fees

  • 2% of the sale price, payable by both the seller and the buyer.

Additional Fees

  • Knowledge fee: AED 10 (added to each fee).
  • Innovation fee: AED 10.

Developer Self-Registration Fee

  • AED 1,000 (for developers).

As declared by the Dubai Land Department (DLD), these fees provide a detailed breakdown of the costs associated with entering into a rent-to-own agreement in Dubai.