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Why ‘Rent-to-own units’ Option is Gaining Ground among Property Buyers?

by Aditya Rawat
by Aditya Rawat
LinkedIn

‘Rent-to-own-units’ offerings are gaining ground in Dubai like never before. However, there is still a lot of confusion surrounding this concept. Developers often come up with rent-to-own options when the supply of the property exceeds its demand. They want to use rent-to-own as a second option to sell the property in order to move the stock, which is more common in projects located far from the city.

What is ‘Rent-to-Own Units’?

In simple terms, rent-to-own properties involve the buyer purchasing the property from a developer by paying on a monthly, quarterly, or annual basis, as specified in the agreement. 

Rent-to-own Unit is a property arrangement which enables individuals to lease a unit for a specific time with the option to buy it later, where the rental payments act as a down payment. The agreement is made between the buyer and developer, operating under tenancy laws in the UAE. This option appeals to aspiring homeowners in the UAE. The developer and buyer must agree on the ownership timeline, which can extend up to 20 years, and the rental amount during this period. The upfront payment is typically around 5% or less, eliminating the need for a mortgage with a 25% down payment. Though rent may be higher than market rates, it offers convenience for buyers struggling to save for a deposit.

Rent-to-own unit agreements are completely legal. Dubai Land Department (DLD) has launched a rent-to-own service through its portal, which is the registration of a specific title of deed to provide a clear legal framework to facilitate such transactions. DLD has issued guidelines and fees related to registration, financing, transfer, and cancellation of rent-to-own contracts. While there are established guidelines, it’s worth noting that the rent-to-own schemes in practice have been individually developed to suit each specific case.

‘Rent-to-Own Units’ – A Faster Way to Become a Homeowner 

There has been a change in consumer buying behaviour towards ‘Rent-to-own’ units in the last few years The ‘2022 Annual Market Watch Report’ by Property Finder finds out that consumer buying behaviours have been rapidly evolving towards more long-term investments, with tenants preferring ownership over rental properties which is majorly driven by the surge in average market value by 25%.

Agreements Available in ‘Rent-to-own units’ 

The two available agreements in ‘Rent-to-own units’ includes – a.) Possibility to Purchase  b.) Purchase Agreement.

a.) Possibility to Purchase: In this arrangement, the buyer pays an ‘option fee,’ a mutually agreed percentage of the purchase price, securing the right to purchase the property in the future. If the purchase isn’t pursued, the option fee is forfeited. This approach allows for careful consideration of property ownership before committing, acknowledging its significance.

b.) Purchase Agreement: All terms are mutually agreed previously with the buyer and developer deciding on a fixed purchase price or choosing to determine the price with a future valuation at an agreed date.

Which Type of Properties is Popular in ‘Rent-to-own’ Option?

Some of the most popular properties in rent-to-own arrangements are single-family homes or townhouses. Buyers are typically looking for properties that they can eventually own and that meet their long-term housing needs.

Several buyers have also shown interest in rent-to-own options for larger, more expensive properties such as – multi-family homes or even commercial properties. However, these types of arrangements may be less common, and the eligibility requirements may be more stringent.

Buyers who are interested in rent-to-own options are typically looking for properties that meet their current and future housing needs and that they can eventually own. Mostly, buyers who are opting for the ‘Rent-to-own’ Option are from India, Russia, Pakistan, and the Middle East.

Developers offering ‘Rent-to-own units’ Option

Some of the major developers offering the ‘Rent-to-own units’ option include –

  • California Village offers a ready-to-move-in and post-handover payment plan that can go for 5 years and a few other options.

Key Factors Influencing ‘Rent-to-own Units’ Option

The rent-to-own trend in real estate is influenced by various factors that can lead to its rise or fall. Economic conditions, such as job growth and unemployment rates, play a significant role. In a stable economy with a strong job market, more people can afford rent-to-own options, leading to a rise in the trend. Conversely, during an economic downturn with high unemployment rates, fewer people can afford this option, causing a decline in the trend. 

The availability and affordability of housing also impact the trend. A shortage of affordable housing or rising home prices may increase demand for rent-to-own, while an oversaturated market or falling home prices may decrease it. 

Interest rates also affect the attractiveness of rent-to-own options, with low rates potentially reducing the trend and high rates increasing it. Additionally, demographics play a role, with a large population of millennials struggling to save for a down payment leading to a rise in the trend, while a population of older homeowners may decrease demand for rent-to-own options.

Is ‘Rent-to-own units’ a Right Option for you?

Purchasing a property on a mortgage from a bank provides long-term stability and ownership but requires a larger down payment, a strong credit history, and a steady income. 

The main differences between renting-to-own schemes and home mortgages in Dubai lie in the down payment amount and eligibility conditions. For home mortgages, a minimum 25% upfront payment of the property value is required. In contrast, rent-to-own programs offer more flexibility, allowing you to try the unit before purchase and have simpler criteria and procedures. Rent-to-own schemes also increase the chances of owning a home in Dubai at reasonable prices, as the first payment is not as costly, and rental payments serve as a form of instalment to collect your capital indirectly.

Things to Remember Before Renting-to-Own Unit

When considering a renting-to-own scheme, it’s important to keep in mind the following points:

  • Thoroughly understand all the clauses, rules, and conditions in the tenancy contract before signing
  • Be aware of price differences based on market changes during the contract period
  • Ensure you have the title of the deed throughout the entire contract duration
  • Understand the time frame for payment and termination clauses otherwise, you might end up paying a higher upfront amount compared to the going rate for similar properties not under a rent-to-own scheme.
  • If you decide to buy the property, check your eligibility for a mortgage to complete the buying process.

Documentation required

  • The value of the property that the buyer and developer agreed on
  • The time frame of the lease contract, according to both parties’ confirmation
  • The title of deed ownership throughout the contract duration
  • Exit terms
  • Penalty clause for defaulted repayments
  • Percentage of down payment (if any) to be refunded in case you decide to terminate the contract 
  • A clause related to sudden job loss, missed repayments, or mortgage rejection at the time of purchase (once the lease term ends)
  • Property maintenance terms to define who is responsible for the upkeep of the property throughout the contract duration

To register for the rent-to-own scheme in Dubai, the following documents are required –

Individuals: a copy of the buying contract, a copy of the Emirates ID. For non-residents, a copy of a valid passport.

For Sole Establishments: a copy of the trade license. For the license’s owner, a copy of a valid Emirates ID and passport. Power of attorney if available.

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

For Foreign/GCC Companies: a Copy of a valid trade license. For the license’s owner, a copy of a 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).

Final words

Undoubtedly, the ‘Rent-to-Own Units’ option has come as a ‘blessing in disguise’ for those buyers who are unable to secure a traditional mortgage due to factors such as poor credit, lack of down payment, or a high debt-to-income ratio. It is a suitable option for those buyers who want to become homeowners but may not have the financial means to do so immediately. Furthermore, rent-to-own options also involve lower upfront costs with more relaxed eligibility requirements.

However, it is also important to remember that the ‘Rent-to-Own Units’ option often comes with higher monthly payments and a premium for the purchase option yet it is much lower than the interest value. This makes rent-to-own a great option for those who can afford high instalment value.