Advantages of Rent to Own House and Lot
Most Filipinos dream of owning their own house and lot. Unfortunately, it is not at all easy despite claims from real estate developers that for the cost of your monthly rental now you can put towards the monthly amortization for your own home. The hitch is two-fold: the 20% down payment, and qualifying for bank financing.
Barriers to entry
You can find house and lots for as little as PhP500,000, but these are usually tiny and in undesirable locations or neighborhoods. In most instances, you will want a location in a safe area close to schools and work. In Metro Manila, the minimum price tag for something reasonably secure is about PhP2million. Many Filipinos simply do not have the PhP400,000 or so for the down payment.
In addition, qualifying for bank financing, which have the best rates, is very difficult. You have to prove that you have the capacity to pay. Philippine banks are notoriously slow and make it otherwise difficult for ordinary people to get a home loan, especially if they already have bad credit. Even if you are credit-worthy, the bank will still require that your income be at a level that is out of reach for the ordinary employee. Most real estate developers will offer in-house financing, but the rates are so high that you end up not being able to afford the monthly payments anyway. They also usually require a balloon payment at the end of two or three years that you have not had a chance to save up for because of the high monthly installments! The only viable option for most Filipinos is a rent-to-own arrangement.
Rent-to-own contracts are similar to a regular lease contract except for three things: the option fee, the extra payment of top of the regular rent, and the purchase price. The option fee is essentially for buying the right to purchase the property at any time your RTO contract is in effect. You can decide not to for any reason, although it means forfeiting it. The extra payment you make is as credit towards a down payment.
Both the option fee and rent credits are non-refundable, but may be used as credit towards your purchase price, depending on the terms of the contract. This can lessen the amount you have to come up with at the end of the RTO contract.
For example, if the regular rent for the property is PhP10,000, you agree to pay PhP15,000, plus the one-time option fee of PhP20,000. The extra PhP5,000 goes to your down payment if you decide to buy it. Presuming a contract period of two years, that is PhP120,000. Add in the option fee and that is PhP140,000. If the purchase price is fixed at PhP1Million, you now only have to come up with PhP60,000.
Advantages of RTO
The most obvious advantage of RTO for buyers is the chance to move in immediately after you finalize your RTO contract. You will be able to become familiar with the house and its problems, and the neighborhood. If at any time you feel that buying the property is not a good idea, you can still back out. At the same time, it gives you a chance to build equity in the home without having to shell out a huge amount, repair your bad credit, and qualify for a PagIBIG loan in case the banks are still being difficult.
Another advantage of RTO is that it locks in the purchase price of the property. It will protect you against property value increases. On the other hand, it also locks you in to the price when property value goes down significantly. In that case, you still have to option not to buy it at that price by simply letting the contract end. You can try negotiating the seller down when the time comes, because he or she will be just as anxious to sell a depreciating property, as you are to buy it.
RTO contracts are good options for cash-strapped home buyers in the Philippines. However, it would be advisable to have a lawyer look over the contract before putting your money in. There are many RTO scams around to take advantage of the desperate and gullible. You can also do your own research on the reputation of the seller to find out if you are walking into a trap.