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Rent-To-Own Contract Tips: For The Protection Of The Buyer

I recently got a comment in my post How To Easily Calculate The Return-On-Investment (ROI) For Rental Properties and as I mentioned in my reply to the comment, this question deserved an entire post so I can answer it in greater detail. For everybody’s reference, I have reprinted the question below:

hi sir,

i have been following your blogs through the referral of my friend marlyn catapang. your blog is so informative and i have learned a lot especially the real estate thing….i just wonder about rent to own properties. i am contemplating to buy a property through rent to own but i’m hesistating right now because i believe that my interest as buyer is not so much “protected” i don’t know if i am right…what if i have been doing my part as lessee or buyer and have been religiously paying my responsibilities — suddenly the seller passed away, what shall be my remedies? what if at the end of the terms of our contract he is suddenly lost and has not issued a deed of sale in my favor yet…i hope you can help me sir…

thank you and sorry…here is another newbie,

milex

I replied through a comment that one remedy would be to include a provision in the contract that the heirs of the seller shall also be bound by what has been agreed upon between the original seller and the buyer. To do this, one can include a provision in the contract to the effect that “It is understood that the heirs of the seller shall honor the contract in case the seller becomes incapacitated or passes away.”

While answering this question, another scenario came to mind. What if, in cases where the seller sold the property via the rent-to-own scheme, and the seller should be paying amortizations to the bank using in part the buyer’s rent-to-own payments, how can the buyer be assured that the seller’s amortization payments are up-to-date? This is important as there have been cases where the buyer religiously paid his installments but the seller did not pay his amortizations to the bank and at the end of the term of the contract, the seller had nothing to turn over to the buyer as the bank has already foreclosed the property.

I believe this can be addressed by adding a clause in the contract to the effect that “If the seller, through no fault of the buyer, does not have the absolute right of ownership at the end of the term as stated in the contract and after the buyer has complied with all the terms of this contract, the seller will return all the payments of the buyer with interest at X% per annum.” The provision on interest shows the seller’s good faith and somehow gives assurance to the buyer that the seller is legally binding himself through the contract.

As for the exact wordings, I strongly recommended that you consult a lawyer and have a customized document be drawn for you to suit your requirements. Always remember to seek legal advice before entering into any contract, agreement or executing any legal document.

Another suggestion would be to drop the idea of entering into a rent-to-own scheme and go for the “assume balance approach” instead. This approach is basically having the buyer assume the balance of the loan of the seller – i.e., the buyer will continue paying the monthly amortizations. In the Philippines, this would require the buyer to qualify for bank financing.

The seller will usually require a big down payment because his profit is already factored in here. You may consider this as a win-win situation since the seller gets his profit upfront from the downpayment and has no more amortizations to think about, and the buyer only needs to assume the balance of the seller, with usually low amortization payments. The catch is that the buyer should be ready with a substantial amount for downpayment.

The assume balance approach has also been used by motivated sellers wanting to avoid foreclosure, and in those cases the downpayment is usually not as big. I know a lot of people are very interested in the assume balance approach, so watch out for a more detailed post on this.

You will notice that I wrote the suggestions above mostly from the perspective of a seller that has considered the concerns of his client, the buyer. This is because as real estate investors, we will often play this role as we sell our properties. I believe that as sellers, we should do what is necessary to ensure our buyers are protected as well. This would lead to gaining their trust and a much greater chance of closing the deal. Otherwise, we might not even have a sale to begin with.

I really hope this helps all those investors out there with the same concerns. If you have any question, please feel free to leave a comment in the comments section of this post.

Update: A sample Rent-To-Own contract is now available on this post https://www.foreclosurephilippines.com/2009/04/19-free-legal-forms-and-contracts-from.html

 


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30 thoughts on “Rent-To-Own Contract Tips: For The Protection Of The Buyer”

  1. good day po!
    mejo namomoblema po kc kmi s nabiling lupa ng tatay q,nid q lng po ng advises,
    nkabili po kc ung tatay ko ng lupa sa kumpare nia although my deed of sale,
    1.wala pong pirma ng legal wife.
    2.wala din pong naka-state na kasama na ung ryt of way sa nabayaran.
    almost 15 years npo kmi nakatira s bhay nmmin,then,dmating ung panahon na namatay po ung kumpare ng tatay ko,then,next ung tatay ko.
    after years,prob po namin:
    ->ung asawa po ng nagbenta s tatay ko ng lupa, cnicngil po kami ng right of way,na almost 120% ung cost compare s pagkakabili nmin ng lupa.meaning,kailangan daw po nmin yon bayadan dhil un po ung cost ng “ryt of way”,kasama na ung “amilyar”,then saka kami mgkakaroon ng karapatan na smin tlaga ung lupa dahil magbbgay po xa ng pirma nia,
    tanong ko po:
    1.since wala pong pirma ng legalwife ung lupa na nabili ng tatay ko sa deed of sale,ganu po ba ktibay ung pinanghahawakan nming deed of sale?
    2.kailangan po b tlga na nakastate ung ryt of way sa deed of sale?since daang tao lng nman ung dnadaanan nmin?
    3.gano po ba kataas ung legal na price percentage ng ryt of way compare dun sa deed of sale?
    thanks po!

  2. Hello po.

    Do you now have post about the assume balance approach? Pinaplano ko kasi yun para sa condo na nakaloan ko sa pag ibig. Thanks po

    1. wala pa po bang link regarding nito?..kasi po we are both in the same scenario and i want to know if the amount of money being asked by the owner is reasonable before i can assume his/her balance….ty po….

  3. sir jay,

    Ang Rent-to-Own po ba pagkatapos ng 5 years term eh hindi p po sakin ung property? Kailangan ko pa po ba ulit syang bayaran? Paki-paliwanag naman po kasi po may balak po akong kunin na property gamit ang rent-to-own po.

    salamat

  4. hello sir,
    Regarding contracts, may I refer to you a paragraph on my contract stating that:
    ” At any time during the effectivity of this Contract, and while there exists any unpaid portion of the Purchase Price, the SELLER may, at its option, require the BUYER to procure a life insurance policy from an insurance company acceptable to the SELLER which must comply with the following conditions:
    * The value of the policy should at least be equal to the unpaid portion or the Purchase Price at the time it is purchased by the BUYER;
    * The SELLER shall be designated as the irrevocable beneficiary under the life insurance policy ti the extent of the value of the unpaid portion of the Purchase Price; and
    * The policy shall be effective as long as there is any unpaid portion of the Purchase Price.
    thanks in advance for the assistance.

    1. Sounds good ZDC, it’s like the equivalent of having Mortgage Redemption Insurance which Pag-IBIG and bank’s require for mortgage loan borrowers

  5. Pingback: 19 Free Legal Forms And Contracts From Philippine Legal Forms

  6. Hi Jay,
    My wife and I have been reading the updates here and it has been very helpful.
    We are recently looking into closing a deal with a buyer with a ren-to-own scheme. We however have recently found out from the seller that they don’t have a copy of the land title. The seller has a petition for reconstitution of lost owner’s copy with the court hearing this Feb (according to the seller) which was filed last Oct. 2009 and will be released this March 2011. Does this usually take that long?
    How can we, as the buyer be ensured that the TCT will be turned over to us upon completion of the contract? If this is the case, what are the possible clauses that we should include in our conditional deed of sale?
    Thanks and more power!
    Niro

  7. hi jay, what is the difference between a referral’s fee and an agent’s fee? I often come across sellers offering referral fee for P10k if they refer a successful buyer. On the other hand there is the usual 3% or 5% commission for agents. What does an agent have to do on his part for his commission.

    thank

  8. I would just like to inform anyone who happens to pass by and read this section that a Rent-to-Own Contract Scheme AND a Contract of Lease with Option to Purchase are NOT THE SAME; hence, both agreements must NOT be understood as interchangeable, rather they are very different from each other. The problem in the Philippines (and brought about by the Filipinos themselves) is the hasty inclination to copy agreements and/or contracts based on foreign customs or ordinary business practices WITHOUT FULL UNDERSTANDING as to the EFFECTS and NATURE of the SAME COPIED AGREEMENTS/CONTRACTS. One striking fact is a “rent-to-own” scheme is borne out of COMMON LAW. Furthermore, this scheme is more equitable and its terms are truly reflective of its contract title.

    On the other hand, a Contract of Lease with Option to Purchase is a scion of the CIVIL LAW system. It is less likely to be a true form of “rent-to-own”.

    I hope everyone remembers this little little note, and you shall be each guided accordingly.

  9. hi Jay, I hope you and your family are already recovering from Ondoy’s aftermath when you get to read this. I would like to ask your advice on how to compute for agent/broker’s fee under rent2own scheme. Where would I base the 5% fee, would it be on the downpayment (initial cash out of buyer) or on the TCP? What if the broker wants to mark up the TCP (yun na bale ang commission niya) How will his share in the marked-up TCP be paid to him kung di naman cash ang transaction? ex. orig TCP is 1.6M /300dp then he wants to sell it at 1.8M (sa kanya na yung 200K difference), so kung mag down yung buyer ng 300K lang does that mean I will have to give him 200k as his share and leaves me with just 100K from the dp? please advise. Maraming salamat.

    1. Hi Theresa, normally the broker’s commission is based on the TCP and is payable once at least 20% DP is paid. If the broker made a markup, my suggestion would be for you to initially pay only the commissions based on the original percentage, which is 5% of 1.6M which is 80K. For the remaining 200K which is his markup, I guess you can pay this in a staggered basis as a percentage of the rentals. Try suggesting this first to your broker and see if he/she agrees or has his/her own suggestion.

  10. Hi po.

    hingi lang po sana ako ng advice regarding sa pag acquire ng isang hpuse and lot na wala pang certificate of true title. Subdivided lang po kc ang lote sa mga ninuno namin. Yung iba buhay pa, yung iba patay na…ngayubn po, yung isang parte gusto i pa rent to own sa akin..anu po kaya ang maari kong gawin na legal na hakbang? kasi po, wala naman silang ( seller) pinanghahahawakan na kanila yun asside sa mga birth certificates lang nila na sila po ay legal na anak…sana po matulungan ninyo ako..thank you po.

    1. Hi legalwife, sa pagkakaintindi ko eh mga ninuno niyo yung may ari nung property right? I suggest that you just help them to get the property titled, which is the first thing that needs to done to make everything legal. You need to find out if the real property taxes are being paid and if the tax declaration is updated. May I know also who pays the real property taxes?

  11. Hi Dubai investor, the collateral would actually be the property itself. I hope that you push through with your plans to venture into real estate when you come home next year, and my wish is that you will be back home for good, without the need to work abroad anymore!

  12. Hi jay as im here in dubai..im planning to venture this busines real property when i go home next year..what can you advice me to start a rent to own business…do i need to raised a colateral if a get the bidding?

    Dubai investor..

  13. Pingback: Sample Rent-To-Own Contract or Contract of Lease with Option to Purchase (CLOP), Philippine Version

  14. @ Rico, the standard practice is 24 post-dated checks covering the first 2 years. The tenant buyer should of course replenish the checks before the end of 2 years.

    @ bulacan investor, its unfortunate you had this experience. I hope there is still room for reconciliation between you, or maybe you can communicate with each other to work things out.

  15. bulacan investor

    hi to all,

    i just want to warn everybody to avoid dealing with atty. raul panlasiqui. i had a bad experience dealing with him. he set a meeting at burger king tomas morato qc at 6pm then i came all the way from bulacan just to meet him and ask from a legal advice regarding my real estate investment..he did not come on time and he just texted me that he will not attend and we will not meet anymore. i and with my relatives wait for him till 8pm…he was refered by a student of dr. larry gamboa to me and i think atty. panlasiqui is also a follower and student of dr. gamboa. i just want to warn you not to deal with him in terms of legal matters. he’s unprofessional person.

    atty panlasiqui, if you read this comments then hope you still remember me.

    thanks

  16. hi jay,

    i have a property which i want to use a rent to own scheme as well..but i want to know if the rent can be covered by post dated checks and if ever it is advisable to ask for 180 checks or 15yrs monthly rent to the lessee?what is the standard practice you used to collect the monthly rent?

  17. Hi Willeus, your in luck, I’ll be posting a sample rent to own contract as my next post, which I will publish tomorrow, April 17, 2009. Please do watch out for it. Thanks!

  18. I’m acquiring a property, for which I will be recovering my investment via the rent-to-own model. Do you have a sample rent-to-own contract that I can take a look at to give me an idea on the provisions to include in order to protect myself, as the seller? I’ve tried searching for “rent-to-own contract” in google, but haven’t had any luck with a Philippine version. I hope you can help. Thanks.

  19. Hi Noel, for lease contracts for residential properties, it would normally cost Php500.00 for a lawyer to draw up the contract, for commercial properties, it would normally cost Php1000.00

    Thanks for your question as I’m sure a lot of people also want to ask the same. Sorry I forgot to include it in my post. I will update it asap.

    1. hi jay,

      I really thought the price is higher that what you have mentioned. I think it is fair enough. I’ll inform my friend because he is also wondering how much is the cost.
      .-= greg s´s last blog ..Contact Us Now =-.

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