Rent-To-Buy – Is this the new way to go?

Right now, the Dubai property market is undoubtedly a buyer’s market. A saturated property market with a lack of competition has meant the value of properties has dropped, with prices dropping from AED1,500 per square foot in July 2014 to AED1,100 per square foot in July 2019. This has only been exacerbated by the current COVID-19 pandemic, which has meant a wave of uncertainty regarding the market. This has resulted in market experts making the prediction that housing prices will remain low.

Renewed Interest In Purchasing

This might explain Bayut’s market report, which states that there has been a renewed interest in purchasing units in Dubai, showing that people do actually want to buy property here. Yet despite the decrease in prices, areas such as Dubai Hills Estate, Arabian Ranches, and The Villa are residential developments that have seen a decrease in property transactions since 2019.  So if it is a buyers market and there is an increasing interest in purchasing property, why is it that more people are choosing to rent and to continue renting properties, rather than buying? One reason why many people are put off from buying property is that the down payments are so big, many people just cannot afford nor justify the cost. Some experts have speculated that buyers are now becoming more careful, especially within the context of today’s economic climate. Yer, the UAE mortgage cap law, means non-UAE nationals have to pay a minimum 20% down payment of the property value, which goes up to 30% if the property is worth over AED5 million, and 40% if its the purchaser’s second property. This means it is extremely hard for those wanting to make the move from renting to owning, whilst still trying to be careful with their finances, as it requires a vast amount of savings, something that is especially difficult for first-time buyers.  As such,  developers are competing for potential buyers by offering different incentives in order to persuade buyers to make the jump into purchasing a property. One such incentive, which tackles the problem of enormous down payments, is Emaar’s ‘rent to own’ scheme.

What is a rent-to-own scheme?

In a rent-to-own scheme, the purchaser assumes the role of a tenant, paying regular rent towards the property whilst they live there, for a fixed-term contract of 4 years. The rental price is fixed for the first 3 years and increases at year four. Yet the rent acts as a down payment for the house, so the tenant can decide by the third year if they want to buy the property altogether. 

There are two types of rent-to-own agreements. The first is an ‘option to purchase’. Under this agreement, the seller and buyer mutually agree on a percentage of the purchase price in return for the option to choose to purchase the property at a later date fully. If the buyer decides to walk away, then they lose the option fee. The buyer loses the right to opt to purchase after the third year. In the 4th year, the tenant is given a month’s notice to vacate the property, and the agreement becomes a standard rental agreement, with the tenant being able to walk away from the property afterwards. 

The second option is the purchase agreement. With this, the seller and buyer agree on a fixed price for the property, meaning that buyers can purchase a house at today’s right, an ideal situation considering the drop in value for Dubai properties. Alternatively,  the buyer and seller can choose to determine the value of the house at a later date, although, with both of these options, the buyer is committed to paying for the property.

What are the benefits of a rent-to-own scheme?

There are a number of advantages to this scheme. Buy-to-own schemes are perfect for first-time buyers who want to get their foot onto the property ladder. First of all, there is no hefty down payment. The down payment is paid incrementally in the form of rent, with initial payments in the first 4 years being split between four cheques per year making it a lot more affordable and manageable. Second of all, purchasers can give their potential home a trial period before buying. Buyers do not have to decide until they are in their third year of the agreement. It, therefore, gives them time to settle into the home and see if they do want to buy the property. It might be that in 3 years, personal circumstances might change, or simply the renter decides they do not want to buy the property, then the tenant can easily walk away from purchasing the property. The buyer can even work away from the tenancy agreement, providing 60 days notice is given to the landlord – something that is not so easy to do if you buy a property through more standard means with monthly mortgage repayments. 

The potential buyers can lock in the price of the property whilst it is still a buyer's market. Property prices may rise in the four years of the tenancy agreement, therefore as long as you decide to purchase the property, you will get a good deal on the property price. Yet conversely, buyers should take a look at industry trends before buying, as housing prices may continue to drop. In this case, the seller and buyer may want to come to an agreement where the price fo the house is decided at a later date. 

Rent-to-buy schemes also give the purchaser time to finance the property. Even if the buyers were able to stump up the small fortune that is required for a down payment, it can be challenging to secure a mortgage plan, especially in Dubai when the property market is so fast-paced. In choosing to go for a rent-to-own scheme, it gives buyers three years to find the best mortgage or financing plan for them, making the entire ordeal much more manageable. 

As the buyer will be, for all intents and purposes, an ordinary tenant, the landlord will be responsible for all major maintenance of the property. This just means there is one less thing the future buyer has to worry about. In the same vein, there is specific buyer protection, as the law requires all properties to be registered with the relevant authorities. Therefore the purchaser will have the same benefits of protections afforded to tenants under the law just as in a standard tenancy contract. The property will be cleaned, checked, and be well-maintained ready for the potential purchaser to move in.

What do I need to be careful of?

Rent-to-buy schemes sound amazing. You get to move into your new home straight away. You can build some equity, as well as get a couple of years to qualify for or find the best mortgage. That being said, there are a few things potential purchasers should be careful of. Future buyers should keep their eyes open and maintain a level head before rushing into an agreement. Before signing the contract, potential buyers should carefully read and understand the agreement’s terms and conditions, paying attention to market price fluctuations, ownership of title deeds, exit clauses and the exact timeframe for payment. Exit clauses and ‘option fees’ can end up being pricey, so buyers should carefully consider the probability of them buying the house when negotiating these aspects of the contract. 

Buyers should understand that whilst they are paying rent for the first 3 years instead of down payment, this may come at a premium. The overall price of the rent/down payment may be a fair bit more than that of a standard rental fee and/or downpayment of properties that are not in a rent-to-own scheme. Whilst this can be worth it if you are definitely planning to buy the property, if you do in fact decide to pull out, it would be an expensive way of paying rent, as you are essentially forfeiting the deposit you spent three years building. 

One other thing that prospective homeowners should look at is making sure they will be able to qualify for a loan. Whilst there is an additional period whilst renting that the buyers can use to secure the best mortgage for them, they still need to be able to finance the property when the rental agreement is over. If they are unable to source the finance, then the renters will be forced to pay the option fee. 

Whilst you do not have to pay for a large mortgage down payment; buyers will still have to pay a 5% security deposit fee.  Other fees on the buyer’s side include 2% of the sale price, AED 250 Title Deed Issuance Fee, Map Issuance Fees (dependent on the type of property) 0.25% of the rent amount, AED 4,000 Registration Fee for properties AED 500,000 or above; AED 2,000 Registration Fee for properties less than AED 500,000 and AED 10 Knowledge Fee (added to each fee). As such, prospective buyers should be aware that there are some upfront costs. However nowhere near to the cost of a mortgage down payment. Potential buyers should also be aware that whilst they intend to buy the property, it is not in fact theirs. As such, they do not have the same amount of control over the property they would have if they bought the property with a mortgage. You will be unable to conduct house changes or renovations until the four-year rental agreement has finished. That being said, under a rent to buy agreement, the future buyers still have a bit more freedom than if they were in a standard rental agreement.

Should I go for a rent to buy?

Emaar’s rent to buy is a blast of fresh air in this current landscape, suddenly making purchasing a home in this fantastic place a lot more affordable. It is the perfect scheme for first-time buyers or prospective owners who do not have large amounts of cash on hand.  If you are considering buying a property, but you do not have the available funds for a deposit just yet, then you should think about this scheme. At a time when it is a buyers market, with property prices at a low, it is too good of an opportunity to waste; as such, this is a good option for those who cannot currently secure a mortgage plan. Through this scheme, it gives purchasers the time to carefully think about and ensure a good mortgage plan, without rushing into one. 

If you are considering buying a property, then you can also take a look at them yourself, to see if this is the right fit for you.  For more information about buy-to-rent properties, do not hesitate to contact our brokers at +971 600 52 2233