With the new rules in place, rent to own may be a very tempting offer to reach home ownership. Is this truly a great option? Rent to own could be an option if it is set up correctly. Let’s look at what a rent to own agreement would need to look like to make the contract work.

What you will need

  1. You will need a market rent appraisal to determine the amount of the rent for the property. Only the portion over the market rent can be considered towards the down payment. Only the portion over that amount can be used as down payment and should be paid with 2 separate cheques.
  2. You will need a contract signed and dated at the beginning of the term when you (the tenant) moves in. If you are already renting the unit and are switching to a rent to own then a new contract should be drafted.
  3. You may be required to provide a high deposit (usually around 10K). The contract must stipulates that the deposit is refundable should the deal not go through. Any other lump sum payment should be stipulated in the original agreement.
  4. You will need to include the date of purchase and the purchase price agreed upon when the sale occurs at the end of the rent to own.

 

The pros and cons of rent to own

Looking at this list, rent to own looks like a great option. Let’s look at the pitfalls of this kind of scenario.

  1. You will be paying higher rent than you would normally pay for the unit. The extra portion is not refundable if you do not purchase the unit. If you can pay that amount why not include that amount in your own bank account until you are in a position to purchase a home.
  2. You will need to prove the actual amount paid towards the down payment, or you might not be able to use that amount. You will be limited in the number of mortgage lenders you can access since many lenders consider this type of transaction like ‘gifted equity’. Gifted equity is only acceptable if it comes from an immediate family member.
  3. You will need to make sure that all parts of the contract align with the insurers (CMHC, Genworth and Canada Guarantee) or the insurers will not insure the deal and you will require a higher down payment (20%) to make the deal work.
  4. You will need to protect your deposit by making sure that there is a close that stipulates that your deposit is refundable. Many times rent to own sellers do not want to stipulate that the deposit is refundable. Even if it is refundable, it does not mean that the seller will give you back the money. They may have already spent it. It would be more prudent if this amount was held in trust at a lawyer’s office. This would better protect you.
  5. You will need to negotiate the purchase price at the beginning of the contract. Should the market stay the same or should the property be reduced in value, then the higher agreed upon purchase price may result in a non-purchase. You will need to pay the difference out of pocket – which means you have over paid for the property. Should the market increase and the set price is lower, the landlord may not want to sell.
  6. You will need to monitor your financial situation. If the mortgage rules change within the time frame of paying rent, your financial situation changes, employment changes, you end up having any credit issues or your debts are too high resulting in the inability to borrow as much as the agreed price of the home, you will not be able to qualify for the purchase. You may need to look at alternative lending, thus requiring more money down and higher mortgages rates. The contract date is often not flexible and if you do not qualify for a mortgage at the end of the term, you will lose all the extra money you have paid for the rental unit. Also should life get in the way and you are late on the rent payment, the contract may become null and void.

The bottom line

Rent to own are very lucrative for the seller and very seldom works out in favour of the renter. Should the seller declare bankruptcy, you will need to be added to the list of creditors and be paid pennies on the dollars if paid at all. You will lose your deposit money.

 

Other things to be considered: Did you get independent legal advice before signing the documents? Who is the rightful owner of the property?

 

Are you actually paying the correct party?

Look into registering the lease against the title of the property that will prevent the owner from selling the property from under you. There is a cost associated to registering a lien and regulations in types of lien allowed.

 

Before you enter in such an agreement it would be best to talk to reputable mortgage brokers. Most brokers and lawyers will tell you – RUN AWAY FROM THIS TYPE OF DEAL.

I HEARD OF A GREAT MORTGAGE OPTION – RENT TO OWN: Work alongside The Wilson Team to get your purchase power on track. Lots of different options are available and would be a more reliable way of purchasing a home. We will provide you with all the ins and outs of these types of options and we will show you better options for you. Start your own RRSP account for the down payment. Collect the tax break and invest that money in your down payment. Look at a flex down program or gifted down payment program etc. We will discuss all your options!