Rent-to-Own -What you should know

BY: JAY BRIJPAUL 

Rent-to-own helps the buyer to own a home in the future and gives the seller an exit strategy in a poor housing market. The hot housing market in the GTA attracts investors who enjoy the profits from real estate without the hassle from tenants. Tenants who enter the rent-to-own program also benefit because they can gradually save their down payment or improve their credit score knowing that they will eventually own the home. Rent-to-own is like a car lease where the rent is an income to the owner and a part of it goes towards the down payment. Usually, a rental contract will have an option to purchase and must not be confused with a rent-purchase deal. The first is only an option where the tenant has the first chance to buy. The second is a purchase, where the tenant is obligated to buy at the end of the term.

To enter the program, the tenant must pay an option fee that is about 2.5% of the purchase price and in addition to the negotiated rent, the tenant pays an additional monthly amount that would be credited towards the down payment on closing. The option fee should be around 7% of the purchase price. If the tenant cannot close the transaction, then the option fee is forfeited by the seller. Tenants in a rent-to-own program can benefit substantially since the price is set up front. The increase over the years can be more than 20%.

As a tenant, engage a lawyer in the process. The lawyer will conduct a title search revealing the name of the owners and the mortgage owing. The next step is to conduct an inspection. Usually, the tenant is responsible for all repairs, including appliances, and improvements made. If the home requires work, then it might not be worth your efforts. Since the price is set up front, order an appraisal so that you can establish fair market value. Investors may negotiate a higher purchase price up front as their profit. Some will inflate the purchase price yearly. It is important to know what is in the contract and ask your lawyer to register the rent-purchase deal on the title.

Tenants must be careful because even a late payment for rent can void the contract and the option fee is forfeited. If at the end of the term, the tenant cannot arrange a mortgage, then the seller can void the contract, forfeit the down payment and sell the property to a new buyer.

Sellers benefit as well because they can enjoy a positive cash flow and do not have to worry about maintenance or repairs.  Over the years, the seller will have paid down their mortgage and will have built equity in the home.

There are some downsides as well; the seller is obligated to sell the home to the tenant, but the tenant is not contractually obligated to purchase. If the tenant does not exercise the option, the seller can be at a disadvantage in a decaying market. If the market climbs substantially, then the seller will be missing out from the increased value.

Like all real estate purchases, both parties should be diligent in their approach. It is best to engage a solicitor who is familiar with rent-to-own. The contract must contain the purchase price, original deposit, closing date, the amount of rent, additional deposits and who will maintain the property. Since this is rent-to-own, landlord and tenant rules apply. For example, if there is no heat in the home, it is the landlord’s responsibility. 

Rent-to-own is a viable proposition in today’s hot real estate market. Investors benefit because a rent-to-own tenant will take care of the investment, knowing that they will eventually become the owners. Investors receive an upfront deposit to help in the purchase, a higher than market value sale, secure rents and a tenant who will take care of the property. When greed is taken out of the recipe, it’s a win-win.