In Lagos, rent-to-own contracts are becoming increasingly common, providing homeownership for many individuals who might not be eligible for typical mortgages. However, what does “rent-to-own” actually mean?

A rent-to-own lease allows you to rent a house for a predetermined amount of time with the opportunity to buy it later. Consider it the combination of house buying and renting. You are trying to become the owner of the house in addition to just making rent payments each month. If you need more time to raise your credit score or save for a down payment before applying for a mortgage, this arrangement may be very helpful.

Even though it seems like a win-win situation, there are important factors to consider before signing a rent-to-own agreement. This article outlines five essential things to know before signing up for a rent-to-own agreement in Lagos.

  1. Understanding the Rent-to-Own Model
    The rent-to-own real estate concept combines buying and renting. Usually, there are two contracts involved: a leasing agreement and a purchase option. This is how it operates:

Lease Agreement: You agree to rent the property for a set amount of time, usually one to three years, when you sign a lease. You pay rent on a monthly basis during this time, which may be more than the going rate because some of it goes toward the purchase price.

Option to Purchase: This gives you the right, but not the obligation, to buy the property at the end of the lease term at a pre-agreed price. You usually pay an upfront fee, called the option fee or option consideration, for this right. This fee can range from 1% to 20% of the purchase price and is typically non-refundable.

Before committing, ensure you understand the terms of both agreements. Pay attention to the following:

Rent Credits: Verify how much of your rent payments will be credited towards the purchase price.

Purchase Price: Ensure the price is locked in or understand how it will be determined at the end of the lease period.

Option Fee: Know the exact amount and terms of the option fee.

2. Assessing the Financial Implications
Entering a rent-to-own agreement has significant financial implications. Consider these aspects carefully:

Initial Costs: Besides the option fee, be prepared for higher monthly rent payments. Ensure you have sufficient funds to cover these expenses.

Rent Premium: Understand that the rent premium (the amount above market rent) is a part of the deal. Ensure it’s reasonable and within your budget.

Credit Impact: While a rent-to-own agreement might not immediately affect your credit score, failing to follow through with the purchase can have financial repercussions. If the option fee and rent credits are non-refundable, you could lose a substantial amount of money if you decide not to buy the property.

Maintenance and Repairs: Clarify who is responsible for maintenance and repairs during the rental period. Some agreements might make you responsible for all repairs, like a homeowner.

3. Legal Considerations and Due Diligence
Legal clarity and thorough due diligence are paramount in a rent-to-own agreement. Follow these steps:

Hire a Lawyer: Engage a real estate lawyer to review the agreements. They can help ensure the terms are fair and protect your interests.

Property Inspection: Conduct a thorough inspection of the property before signing the agreement. Identify any potential issues that could affect your decision to purchase later.

Title Search: Ensure the property has a clear title. Verify that the landlord has the legal right to sell the property at the end of the lease period.

Terms and Conditions: Check all terms and conditions, especially clauses related to defaulting on payments, early termination, and responsibilities for property upkeep.

4. Market Conditions and Property Valuation
Understanding the real estate market in Lagos and the valuation of the property is crucial:

Market Trends: Study current market trends and forecasts. If property values are expected to rise, locking in a purchase price now could be beneficial. Conversely, if a downturn is expected, you might end up overpaying.

Comparable Properties: Compare the rent-to-own property with similar properties in the area. Ensure the pre-agreed purchase price is reasonable and in line with current market values.

Future Appreciation: Consider the potential for future appreciation. Properties in rapidly developing areas of Lagos are likely to appreciate more than those in stagnant regions.

5. Long-Term Commitment and Exit Strategies
A rent-to-own agreement is a long-term commitment, and it’s essential to have a clear exit strategy:

Personal Circumstances: Reflect on your personal and financial situation. Are you likely to stay in Lagos for the foreseeable future? Do you foresee any changes in your financial status that could affect your ability to buy the property?

Financing the Purchase: Plan how you will finance the purchase at the end of the lease period. Start improving your credit score and saving for a down payment. Explore different mortgage options available.

Exit Clauses: Understand the exit clauses in the agreement. What happens if you decide not to buy the property? Ensure you know the financial implications, such as forfeiting the option fee and rent credits.

Flexibility: Check if the agreement allows for extensions. If you need more time to secure financing, having the option to extend the lease can be beneficial.

Rent-to-own agreements can be an excellent pathway to homeownership in Lagos, especially for those who might not qualify for a traditional mortgage. However, it’s crucial to approach these agreements with a thorough understanding and careful consideration of all aspects involved.

By understanding the rent-to-own model, assessing the financial implications, conducting due diligence, considering market conditions, and planning for the long term, you can make an informed decision that aligns with your financial goals and personal circumstances. Always seek professional advice to ensure your interests are adequately protected, and you are fully aware of your rights and obligations under the agreement.

Rent-to-own offers a unique opportunity, but like any significant financial commitment, it requires diligent preparation and a clear understanding of the terms and potential risks. By keeping these five key considerations in mind, you can navigate the process confidently and move closer to achieving your dream of homeownership in Lagos.