Smart Money has looked at the plight of first-time home buyers and self-employed potential buyers that struggle to enter the property market. Nearly 50% of employed bond applicants are declined every month and about 58% of self-employed applicants can’t secure home loans, which is not good news for those who want a home of their own.
Generally speaking, bonds are refused because clients don’t have a deposit (although 100% bonds are advertised by banks, applications are not granted very frequently), or because banks feel clients can’t service their loans. A poor credit history also counts against the applicant. Even a judgement or a late payment of an account can halt an application.
A new concept that might make life easier for potential buyers — and sellers who are struggling to sell or to get their asking price — is Rent2Buy, touted as an alternative way to buy and sell properties.
How does it work?
Rent2Buy helps to negotiate an agreement between a potential buyer and a seller so that the buyer can rent a place with the option to buy it by a certain date, at an agreed price. Sellers know they will get their selling price in the future, and prospective buyers will be paying rent equal to a future bond repayment.
The seller is protected by the higher rental income as well as rental insurance, which is factored in. A rental agency usually charges 10% insurance, but the percentage here is 4,5%, which is shared by both prospective buyer (2,5%) and seller (2%).
The prospective buyer’s deal is sweetened by the fact that he can rent with the option to buy; he can walk away at any time if affordability becomes a problem (he is not locked in, as would be the case with a traditional bond); and he can use this “probation period” to prove his affordability and his discipline in terms of paying on time and in full.
Prospective buyers can take immediate ownership of a property and take over the responsibility for it, too — including all rates, taxes, levies and maintenance — just as if they were the de facto home owners.
In effect, there is little risk for the buyer, the seller and the bank.
Meyer de Waal, the founder of Rent2Buy, says that after exploring a few overseas Rent2Buy options, he realised some adaptation would be needed for the South African market. Realising that buyers might default, he considered how he could best protect all the parties.
“A lady defaulted on my very first deal,” he recalls.
“After six months, she was transferred to another province, so she had to withdraw. But the seller was happy because she had been paying rates, taxes and the bond for six months and looking after the garden, too, because she had developed a sense of homeowner’s pride.”
De Waal says there are two different options on offer. The six- to nine-month period involves buyers paying the equivalent rental to a bond repayment. Traditionally, when you buy a property, you don’t pay capital back during that period, and the same applies here, because if you load the buyer at the outset he’ll be back to square one in terms of affordability and may default.
Over 12 or 18 months, or a two-year period, the buyer pays about 9,5% or 10% rental (this includes 4% more than the usual rental, as rentals are about 6% of the value of a property, on average). This means that he will eventually need to apply for a 90% bond — this will also ease the burden somewhat. So if you’re looking at a R1-million property, you would be paying off R950 000,00.
This is attractive for the seller, who will take the property off the market for 18 months and thus receive a higher rental income. The purchaser scores because the purchase price is ‘fixed’ and he or she gets a foot in the door in the property market. He or she will also be able to pay off on the deposit as well, if the seller is agreeable (this is optional).
Home owner education
Rent2Buy also attempts to make life easier for prospective buyers by offering a home owner education programme to train and mentor bond applicants. This should increase their chance of securing a home loan. The My Budget Fitness programme looks at improving an applicant’s credit rating and affordability. Rent2Buy developed the programme in association with Solly Molefe of Setsmol Training.
You don’t have to be a Rent2Buy customer to sign up for the programme and you can also access the software on your cellphone.
The programme really targets first-time home buyers, as well as the self-employed, who need some kind of ‘track record’ before they can secure loans.
With the property market as flat as it is, this might be a way to boost it, while assisting sellers who are currently struggling to sell. It looks like a win-win solution.
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