Rent to Own

The idea of rent to own has been getting a lot of media attention lately as buyers in all geographic areas and economic positions look for ways to have their money work more effectively for them.

The “rent to own” strategy has been very active in the United States for years, and with the newly increased media attention it is starting to become a more viable option for homeownership in Canada as well.

Who Would “Rent to Own”?

Rent to own is mostly used by those who would not normally qualify for a mortgage through a regular bank application. This could be due to not having an adequate down payment, or hiccups on their credit history, or they may be behind in Revenue Canada payments. Some who are self-employed or have occupations with unverifiable incomes may also consider the rent to own option.

How Does it Work?

This option, also commonly referred to as lease to own or option to purchase, works by having the tenant pay a certain amount for a set period of time. After that time, the tenant has the option to purchase the property for a lump sum, minus any previous rent payments applied to the purchase price.

There is usually a predetermined, initial deposit from the prospective tenant. Here is an example of how rent to own could work.

Purchase Price $350,000.00
Deposit $5500
Monthly Cost $2000 (Rent = $1500 and credit toward home purchase = $500)

After 24 months the full required 5% down payment is saved:
$5500 + (24 X $500) = $17,500

You would then need a mortgage of $332,500 to complete the purchase of the home.

Make Sure You Have a Plan

For whatever reason you are looking at “rent to own”, ensure that you have done your homework and that you have an action plan to ensure your investment is safe. If you have credit issues, ensure you work with your CENTUM Mortgage Professional to get a plan in place to rebuild your credit. If you have self employed income, seek ways to have your income verified. Your CENTUM Mortgage Professional can assist with this as well.

Read the Fine Print

So here are some things that may not be readily available to the general consumer:

• There is no standard contract for “rent to own” in North America
• Rent to own is not covered by the Residential Tenancy Act in most provinces nor do they facilitate any sort of mediation for those who have entered a rent to own agreement.

For your best interest, you should have a contract drawn up by a lawyer or notary public and signed by the “landlord”. The cost would be around $500, but it will lay out a clear understanding between you and your landlord as to how the process will be conducted.

What Questions Should You Ask if Entering into a “Rent To Own” Agreement
What is the term of the agreement? Customary “rent to own” agreements say that the tenant makes all repairs to the property for amounts under $500. You should then ask how repairs over $500 are going to be handled. Will they be reimbursed? Should circumstances arise and you are late with your rent, ensure that you have an agreement in place that your investment will not be lost.

With the imposed tightening of the mortgage approval process, homeownership has indeed become less attainable for some. Rent to own is one option that is relatively new to Canada. If you are considering this option, do your homework.