Should you go for rent-to-own?

There are plenty of different ways to purchase properties in the UAE. From mortgaging residential property to leasing an office, the possibilities are endless.

One growing method of obtaining property is by utilising rent-to-own schemes. Rent-to-own is becoming increasingly popular, especially in Dubai.

In this article, we discuss the most frequently asked questions about rent-to-own programmes in Dubai.

What is rent-to-own?

In simple terms, a rent-to-own agreement allows the purchaser to occupy the designated property under a tenancy agreement. At the end of the term, the purchaser has an option to purchase the property.

Throughout the tenancy, a portion of the rent is allocated towards payment of the purchase price. If the purchaser decides that they want to own the property, the remainder of the balance must then the paid.

If the purchaser does not want to buy the property, the contract simply ends at the end of the term. Typically, the purchaser will have to pay a fixed amount known as an option fee as well as the rent paid at the end of the agreement.

How do I opt for a rent-to-own scheme?

The first step is to find a suitable property. Conduct careful research to find a reputable developer or independent seller, before arranging a viewing. It is often best to attend more than one viewing at different times of the day so that you can get a complete understanding of the area. If you are satisfied with both the area and property and have performed the relevant checks, then the next step is to explore the rent-to-own agreement.

The rent-to-own agreement must include specific information such as the value of the property, the lease term, and the title deed of ownership. It is also important to carefully consider other clauses such as exit terms, penalty clauses, and property maintenance terms. Always consult with a specialist to ensure these terms are in your best interest.

The law requires all sales, leases, and mortgages in Dubai to be registered with relevant authorities. If the rent-to-own property is not registered then the agreement is invalid and cannot be enforced.

The Dubai Land Department (DLD) is responsible for maintaining the registration system for rent-to-own agreements. This ijarah service has a specific title deed register and provides a clear framework to facilitate rent-to-own transactions.

For registration to be accepted by the DLD, the seller must pay certain fees unless the contract states that this is the responsibility of the purchasers. These costs include:

• 2% of the sale value
• AED 10 for knowledge fees
• AED 10 for innovation fees

The purchaser also has to pay some nominal fees. These include:

• 2% of the sale value OR
• 25% of the rental value
• AED 250 for title deed issuance fees
• AED 100 fee for issuance of land map
• AED 40 knowledge fee at the rate of AED 10 per fee
• AED 40 innovation fee at the rate of AED 10 per fee

If the property is worth more than AED 500,000 then the Real Estate Registration Trustee will charge a further fee of AED 4,000. Where the property is less than AED 500,000, this fee is reduced to AED2,000.

What are the benefits of rent-to-own?

For a buyer, there are several advantages of rent-to-own properties. Rent-to-own homes provide the purchaser with an opportunity to save money for the balance while paying rent. As some part of the purchaser’s rent is tucked away to be used for the overall property price, it also means that the purchaser does not have to pay a large deposit upfront. This is particularly useful for those with less than desirable credit scores, as they can build up their credit score over time to obtain a mortgage.

Further, the purchaser can often lock in a purchase price with their contract, meaning that they can agree to buy at today’s price with the actual sale taking place in the future. The purchaser will therefore be unaffected by increasing home prices.

Renting before the purchase also gives the purchaser the simple opportunity to “try before you buy”. The purchaser can see themselves in the home, get to know the neighbours, and explore local amenities to ensure they would have a comfortable life in the area.

There are also advantages of rent-to-own properties for the seller. In the wake of the pandemic, many people have unfortunately ended up with a diminished income or lost their jobs altogether. This means it is likely that prospective buyers will struggle to finance a large deposit for a new home. Developers and sellers can utilise rent-to-own schemes to circumvent the growing issue of buyer deposits, helping to encourage sales in slow markets.

Rent-to-own properties allow the seller to earn an income prior to the sale. If the seller does not need to sell right away, having this extra money is a lucrative opportunity. It can allow the seller to save for a bigger down payment on their next investment opportunity to bolster their portfolio.

This scheme also opens up the seller to more serious tenants. As the tenant may want to purchase the property in the future, they have an invested interest and are therefore more likely to take considerable care of its maintenance.

Is rent-to-own worth it?

Rent to own properties are a viable option, particularly in slow markets following the pandemic. When following the best practices, a rent-to-own property can be a lucrative scheme for both sellers and buyers.

If you want to discuss rent-to-own opportunities in Dubai, get in touch with our residential team today.