I can’t get a home loan, what now? Rent2buy in 2018
When a home loan is declined, few aspiring home buyers are aware that there is a Plan B which has been available to home buyers in SA since 1981.
This is according to Meyer de Waal, conveyancing attorney in Cape Town who has done an in-depth study of instalment sales and rent-to-own property transactions over the past 10 years He says statistics show that 50% of home loans are still being declined and few buyers qualify for 100% home loans as the lending institutions or banks are demanding an average 10% to 15% deposit from a home buyer.
“Some 10 years ago we started and fine-tuned the concept of rent-to-own. The concept of Rent2buy was then developed. The upside of the Rent2buy concept is that it is a simple process to conclude the agreement,” says De Waal.
Back in 1981 when banks and building societies often faced liquidity issues, to secure a home loan an investor often had to make a counter deposit with a bank or building society to match the amount of a home buyer’s loan, says De Waal.
The introduction of the Alienation of Land Act, No 68 of 1981 created a method for a property seller and a buyer to enter into an instalment sale agreement in which the parties agreed to pay off the purchase price of the property over a period of time, usually a five-year period, and in at least two or more instalments. This concept, however, is still available for all types of properties, however, not for agricultural land.
This can almost be seen as the modern-day concept of a “peer-to-peer” type of transaction wherein the finances of a bank are eliminated and the seller and buyer enter their own financing agreement to pay off the purchase price.
The question thus arises: Why has this not become a plan B for all types of property transactions where a purchaser struggles to secure a home loan?
The answer most likely lies in the reality that most property sellers are just focused on Plan A: to secure a cash or a bond-approved buyer. Few sellers are prepared to wait for an extended time to receive the full purchase price, says De Waal.
“However, we find that more and more sellers, particularly those who own vacant plots, investment properties or holiday homes that they struggle to sell, are prepared to wait for their money, as long as the repayment of the purchase price is well structured and secured,” he says.
De Waal says buyers who struggle to raise a home loan, like buyers with low credit scores, or with affordability and revenue streams that a bank would struggle to accept, like self-employed buyers and entrepreneurs who all derive their income for various sources, as well as foreign buyers, are all exploring innovative methods to secure a home loan.
“Our most recent instalment sale was for a property of R1.7 million,” says De Waal. “The seller struggled to sell the property and he found a foreign buyer who came up with a 30% cash deposit, and we prepared an instalment agreement to conclude the deal. We also created a trust for the purchaser to overcome the National Credit Act (NCA) requirements.”
The question is asked, why are there not more instalment sale agreements? The problem is that since the National Credit Act was promulgated, and with recent amendments, an instalment sale agreement is regarded as a credit agreement under the NCA.
A seller selling a property through an instalment sale must register as a credit provider under the NCA, and then apply all the NCA rules and regulations to avoid the concept of a reckless loan. It sounds easier than said, but the NCA registration process can take up to 12 months, says De Waal.
The buyer must also bear in mind that transfer duty is payable within six months after conclusion of the transaction to avoid penalties on the late payment of the duties. The instalment sale agreement and the process that follows after the parties entered into the agreement are prescribed by the Alienation of Land Act and it is quite an administrative intensive protocol to follow, says De Waal, “but it does provide good protection for a home buyer”.
Is this method then “dead in the water”? No, says De Waal.
“Luckily there are a few ways to legally address or overcome the NCA registration process. We still find that for many property transactions when a large deposit is paid to the seller, buyers then prefer the instalment sale route as they enjoy protection of the registration of the terms of the agreement against the title deed of the property in the deeds office, and also the statutory protection in favour of the purchaser in case of insolvency of the seller,” he says.
“However, many more parties find the requirements of an instalment sale too complicated and then look for another Plan B.”
Is there an alternative Plan B? Yes, says De Waal.
“Some 10 years ago we started and fine-tuned the concept of rent to own. The concept of Rent2buy was then developed. The upside of the Rent2buy concept is that it is a simple process to conclude the agreement,” he says.
“We usually use the same deed of sale/offer to purchase that the seller and buyer signed (that ‘collapsed’ when the home loan was declined), and add a Rent2buy option ‘on top of it’, plus a lease agreement and exercise of the option. The ‘exercise of the option’ is only signed at the end of the Rent2buy term, say 12 or 24 months later, which is when the buyer secured finances, usually in the form of a home loan.”
The Rent2buy concept is not regulated under the Alienation of Land Act, although a formal purchase agreement is drafted (if not already in place), and the sale agreement sets out the purchase price and terms that will ‘kick in’ once the option to buy is exercised.
The buyer usually pays a higher rental than he would have paid for a ‘normal’ lease of the property. The extra rental is paid to the seller, but credited as a ‘savings towards a deposit’ by the seller. This means that at the end of the Rent2buy term, the purchaser can deduct the deposit paid and apply for a smaller home loan.
“We also combine homeownership education, debt and affordability repair and improvement, regular credit and affordability assessments through the series of a Rent2buy and My Budget Fitness personal training to ensure that a Rent2buy buyer stays fit, and even improve ‘credit score and affordability fitness’ during the Rent2buy terms,” says De Waal.
“We mentor and guide the Rent2buy buyer during the full Rent2buy term, and also assist them with a home loan application just before the expiry of the Rent2buy term. One lending institution even asked to partner with us, as they realised that when a Rent2buy buyer applies for a home loan at the end of the Rent2buy term, it is supported with a full history and proof of regular payments of an instalment that is as close as possible to a future home loan instalment, and also supplemented with a strong credit score and other up to date financial documentation.”
De Waal says their Rental Guarantee arrangement with Rentmaster then provides the seller with peace of mind as the rental collection and distribution is secured and underwritten through Rentmaster. With the Rentmaster/Rent2buy guarantee, the landlord receives his or her rental on the first day of each month, the rent is guaranteed for three months, and all legal costs are covered, in case the tenant has to be evicted.
“This is an enormous security blanket for a Rent2buy seller, as I recently learned from a landlord that was not covered by a rental guarantee that it cost her almost R40 000 to evict a non-paying tenant on a R6 000 per month rental agreement,” says De Waal.
“The biggest hurdle we had with Rent2buy was stock, sellers are still looking for Plan A, and will only consider Plan B if that does not work out.
“Plan B just turned into Plan A, as our two new Rent2buy products are sure to provide a solution many home buyers are looking for,” says De Waal.
“Firstly, one of the largest construction groups that also sell properties, Group 5 Properties, granted us a mandate to market and sell three types of Rent2buy units in the Glen Acres Park Estate development.”
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“The second, and most likely the hottest new way of buying a property in 2018, will be an innovative way for home buyers in Gauteng and Cape Peninsula to secure the home of their own choice in the price range from R400 000 to R1. 8 million,” says De Waal.