How does rent-to-own real estate work? This blog will give you an idea of what to expect when considering this way to sell or purchase real estate.
A rent-to-own is generally considered when a buyer does not have a down-payment. It will give them the opportunity to rent a property for a specified period of time during which they will accumulate the necessary down-payment. This is done by increased rent payments and through their own savings.
As an example, let's say the rent for the property is normanally $1,000 a month. The buyer and seller agree for the rent to be increased to $1,500 per month. The additional $500 each month would go towards the down-payment. If the rent-to-own agreement specifies a rental term of 1 year, then the buyer would have $6,000 to use as a down-payment at closing.
There are pitfalls though. The buyer is approved for a mortgage at the beginning of the agreement. When the rental term is about to expire and the transaction is due to close, the buyer will once again have to go through the mortgage approval process.
The mortgage company will require proof of income, list of debts and a credit check for each buyer on the application. If the debt load has increased or an applicants credit rating has dropped, a mortgage on the property may no longer be possible. The buyer will not be able to complete the transaction.
The question then is what happens to the agreement? The seller is expecting the transaction to close. Without a mortgage the buyer cannot proceed. And what happens to the additional $6,000 the buyer has paid in rent over the past year?
What happens if the original agreement is for a selling price of $220,000 which is fair market value at the time? But a year later when the transaction is to close the property is worth $190,000. The seller will want their $220,000 but the buyer only wants to pay $190,000.
Let's say the buyer wants to conduct a home inspection prior to closing. If the report reveils a problem that the seller will not correct and the buyer will not accept, what happens? Again, what happens to the extra $6,000 rent that was paid?
These are scenarios that could develop when considering a rent-to-own. The Ontario Landlord and Tenant Act will be in effect during the rental period. If the transaction does not close, the seller will continue to have a tenant occupying their property.
It is recommended that you CONSULT WITH A LAWYER BEFORE YOU SIGN ANYTHING with regards to a rent-to-own. This applies even if you are using a real estate agent to draw up the agreement. Take all the paperwork to your lawyer and have them review and explain the terms and conditions that you will be bound to. Doing this before you sign could save you many thousands of dollars down the road.
Up until a few years ago, you needed 5% of the purchase price as a down-payment to buy a single family residential property in Canada. This rule has changed as you can now get into the market without a downpayment. Those that qualify can finance the property for 100%. Needless to say you have to have a good credit rating. When you take this into consideration, maybe a rent-to-own is not necessary.
