All that glitters is not gold: Breaking down the truth about rent-to-own schemes

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Kita Mo
Kita Mo
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You see the ads plastered all over the internet. It’s usually something to the tune of P8,000.00 of monthly rent, no down payment, and a promise that you can own a piece of property after two or so years. What a steal right? Not so fast.

Rent-to-own schemes are one of today’s most common marketing ploys attracting yuppies and young families. For those who are strapped for cash and cannot pay a house or a condominium’s cost upfront, it is extremely tempting to jump into a rent-to-own agreement that breaks down the expense into smaller amounts spread overtime. 

Also called lease-to-buy, rent-to-own seems like a convenient way to achieve the once elusive dream of having a house at a young age. In the United States, the American Dream originally meant achieving one’s own version of success through hard work. This has been made more tangible over the years, as the American Dream eventually became associated with having a good job and owning a house and a car. Most individuals would toss in a happy family into the package.

In many ways, we can say that Filipinos have their own version of the American Dream: a college degree, a professional license in their industry, a well-paying job, a house, a car, and a complete family. Couple this with the country’s fast-growing middle class and a young population, and you have a recipe for a thriving property market with a huge rent-to-own subsector.

How RTO schemes work
So what is rent-to-own, exactly? Simply put, it’s a limited-time option to purchase a property at a predetermined price that is usually above average market prices. 

Let’s take a look at a P2.5m-property that costs P25,000.00 in monthly rents. The owner would like to take it off the market by selling it via a rent-to-own scheme. Since the property is now up for sale, the seller would add an additional cost on top of the P25,000.00 and bring the property to as high as P32,000.00 per month. 

The P7,000.00, called the premium or rent credits, compounds every month and becomes part of the down payment once the buyer finally decides to purchase the property. The buyer is then given 24 months to complete the down payment. In the event that the buyer decides not to purchase the property, all premiums will be forfeited and will go to the seller or the owner.

Before any payments are made, however, some schemes allow the buyer and the seller to agree on price and come up with a contract. Regardless of the agreement, the seller usually has the upper hand in deciding a minimum amount that cannot be lower than or equal to average market prices. The seller will also consider the property market’s outlook, and ensure that buyers will not pay less than future prices.

Rent-to-own agreements vary depending on the seller and the developer. Some use a 10 + 10 + 80 payment scheme where the buyer needs to pay a 10% down payment upon signing of the contract, the next 10% spread over a specific time period, say 24 months, and 80% in cash afterwards or for another 24 months using bank financing.

As you can see, the payments become heavy after the first 24 months, when buyers pay as little as P10,416.00 in monthly rent minus the agreed premium or rent credits for a P2.5m property. After 24 months, the buyer will have paid P360,000.00 including a P4,384.00 premium per month. 

If we do the maths of the 10 + 10 + 80 scheme, the buyer would need to settle P2,140,000.00 in cash or bank financing, the latter of which would require additional interest depending on the payment period. At this point, the buyer needs to have a good credit standing if they want to take out a loan and pay the remaining amount. 

Some sellers and developers employ 10 + 20 + 70 or 10 + 30 + 60 payment schemes. Regardless, the bulk of the payment is usually paid after the first payment period. Here are other fees and requirements that you will find common in the market:

  • Reservation fee. This is a small amount, usually P10,000.00, that is deductible from the total contract price;
  • Issuance of post-dated checks. Most sellers would require buyers to issue post-dated checks depending on the payment period to cover for the monthly rents;
  • Realty taxes. These are usually on the buyer, and may be reimbursed should they forego the decision to purchase; and
  • Maintenance and repairs. Sellers will not be responsible for the expenses that come with enhancements, maintenance, or repairs within the property.

Will it work for you?
The decision is yours. Maybe you are quite certain that you can save up and pay for the remaining 80% of the contract price after 24 months or maybe you need to regain your good credit standing. Whatever the case, it is important to do your research and plan ahead.

We can safely say that RTO schemes are more of a marketing strategy than a way to give you better access to your dream home. Two years sounds like a long time and enough time to save up for that 80%. In reality, time flies and the next thing you know, you’re missing a payment or two and voiding your contract (and the premiums you paid for a while, ouch).

The painful truth is that those who cannot qualify to buy a house today may not be ready for the regular payments that an RTO scheme requires. In fact, social media is replete with individuals looking for other potential buyers to do a “salo” and pay the remaining amount that they can no longer afford. These individuals then lose the home they’ve been waiting to have.

If you put two and two together, rent-to-own schemes are actually even more expensive than if you buy a property and pay regular mortgage. If you don’t want to spend big in one go, then maybe you can settle with paying rent and saving the rent credits for yourself. It can go a long way.

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