HBA: Five tips for the success of proposed RTO schemes

Housing and Local Government Minister Zuraida Kamaruddin said recently that several rent-to-own (RTO) schemes will be launched in September. The Housing Minister went on to say that her ministry, together with several banks, are in the final process of introducing the schemes, especially to those earning RM3,000 and below.

In principle, the House Buyers Association (HBA) supports RTO schemes if such schemes can truly help the rakyat, especially the low- and middle-income groups, to buy their first homes. With the current high property prices compounded with the rising cost of living, a majority of the rakyat, especially the low-income, and even the middle-income segments, find it very challenging to buy their first homes. This is especially true for the younger generation and single income families.

HBA had, in the past, called for the RTO schemes to be expanded to include the middle-income segment or M40 segment. Traditionally, RTO schemes were meant for the lower-income segment or those in the urban poverty or B40 segment in the form of public housing programmes such as People’s Housing Project (PPR) homes.

Due to escalating house prices and the rising cost of living, even the M40 with median monthly household incomes of RM6,275 find it challenging to buy their dream homes. The HBA believes that developing RTO schemes for the M40 would go a long way towards helping the rakyat own homes.

A typical RTO scheme is supposed to provide a lower entry cost to owning a unit as the tenant does not need to pay for the hefty 10% down payment to secure the unit, and legal fees and stamp duties for tenancy are typically cheaper compared to that of loan agreements and sale and purchase agreements.

The Tenant merely needs to rent the unit by paying the security deposit (typically up to three months’ rental) and some utility deposits and can immediately rent said property with an option to purchase in the future. The Tenant needs to pay the monthly rental and when the Tenant is financially ready to purchase said property, the Tenant can exercise the option and will need to pay a revised monthly instalment payment.

In order for RTO schemes to succeed, it has to have the following key features.

Price of the property

The price of the property must be locked in based on today’s price and not the prevailing market price, say, five years in the future. This is because the rate of increase in property prices are normally higher than the inflation rate or rate of increase in salaries. If the property price is going to be based on the prevailing market price in the future, the tenant/aspiring buyer may not be able to afford it.

Monthly rentals (before execution of option to purchase)

The monthly rent of such housing units (before executing the option to buy) should be cheaper compared to the prevailing market rentals or equivalent to monthly loan instalments for similar housing units. In addition, the rent and any rate of subsequent increase should be stated upfront.

Protection for both Tenant and Landlord

So long as the tenant is paying his monthly obligations on time and in full, the Tenant must be guaranteed the right to occupy the property during the contract period. The Landlord cannot arbitrarily evict the Tenant/Buyer. At the same time, should the Tenant/Buyer default on his or her obligations, the Landlord must be able to evict the recalcitrant Tenant/Buyer.

Option to buy is exercisable at the sole discretion of Tenant

The Tenant should not be legally obligated to purchase the property. In the event that the Tenant does not wish to exercise the option to purchase the property, the Tenant must be allowed to continue renting the said property based on terms that has to be stated upfront. Should the Tenant wish to exercise the option to buy the said property, the Landlord or Owner of the said property cannot decline.

Obligations after executing the option to buy

Any payments required to execute the option to purchase the property must be clearly stated upfront together with the revised monthly payments required. It is envisaged that the monthly payments will be higher and the Tenant must be clearly informed of the revised amount in order to make an informed decision whether to exercise the option.

The HBA also calls for careful screening of all participants of this RTO scheme to ensure that it reaches the intended target group. In addition, the HBA calls for regular checks to be conducted to ensure that such RTO units are not sub-leased out.

As there are plenty of overhang properties (completed but unsold housing units), HBA calls for the government and private developers to offer these overhang properties for the RTO schemes. This will offer some cash flow relief to developers and offer immediate housing units to the participants of the RTO schemes.

Datuk Chang Kim Loong is the Hon. Secretary-General of the National House Buyers Association (HBA). 
HBA can be contacted at: Email: [email protected]
Website: www.hba.org.my 
Tel: +6012 334 5676

This story first appeared in the EdgeProp.my pullout on Aug 23, 2019. You can access back issues here.