Rent-to-Own Schemes

Here's why rent-to-own schemes (RTOs) are more complex than most people think.

There are typically two ways to purchase a property: cash upfront or borrow from a bank. If buyers can't do any of these, they resort to another option: rent-to-own.

RTOs are, in essence, two contracts combined: a lease contract and an "option to purchase" contract. The second contract will state that the renter/buyer MAY choose to purchase the property at a future date. On a pre-agreed date, the buyer must pay for the balance (by cash or loan).

Some developers structure RTOs in a way that they also act as a creditor. In these cases, the purchase becomes an obligation rather than an option. If this were the case, we could view these RTOs as a lease contract and a loan agreement.

The problem lies in the idea that buyers could pay rent (at market rate), which would get credited from the total purchase price.

In truth, they're paying for the rent PLUS a certain amount. The additional amount would be based on interest rates higher than typical bank loan rates (i.e., >9%). If they can't get a bank loan, their creditworthiness must be low, thus the higher rate (i.e., "risk premium"). The additional amount would then push the overall monthly payment to an amount a likely buyer can't afford.

Here's an example of an apartment for sale from the internet:

Price: 5.4 Mn

Downpayment: 270K (12 months to pay)

Monthly:54.9K (25 yrs to pay)

+ Rent in the area: 35k

+ Additional Amount: 14.9k

+ Dues, Insurance, RPT: 5k

In this example, the monthly payment is 56% higher than just renting. Assuming he was qualified to borrow from a bank (and assuming the same variables), his monthly payments would just be Php44.5K.

This example shows that RTO schemes are generally more expensive than bank-financed purchases. If they weren't, I would expect a "catch" in the RTO contract.