What are they? Rent-to-own arrangements are similar to leasing a car – a tenant lives in the home under a Lease Agreement for an agreed length of time, with the option of buying the property (as outlined in the Option to Purchase Real Estate Contract).
Upon establishing the option contract, the method of determining the future price is agreed upon. Tenants usually put down a deposit which is non-refundable if they decide not to go ahead with the purchase when the lease is up. However, should they decide to buy the home then the deposit is put toward their down payment.
How do they work? There are lots of ways to set up a rent-to-own. Possibilities include:
Increasing the total rent amount and use a portion each month to build up credit for the tenant’s future down payment.
Charging regular rent with additional payments on top of the rent. The additional payment can be monthly or be based on commissions, bonuses or tax refunds each year. Again the idea is to have enough built up towards a down payment for the tenant’s future purchase.
Why choose a rent-to-own? Rent-to-owns are popular with peopled who do not qualify for their own mortgage financing. This could be because they lack a down payment, are self-employed, have poor credit history, lack continuous employment, are new Canadians or own another home that they can’t shift.
For sellers, the rent-to-own option is popular during a slow housing market. It also helps sellers avoid paying double mortgage payments, or possibly avoiding a mortgage prepayment penalty. Alternatively, they could use the rental income to qualify for a new mortgage on another home.
8 advantages of rent-to-owns (for sellers)
- Vacancy, advertising and tenant turnover are eliminated
- Sellers can charge higher levels of rent, as buyers are attracted by prospect of owning the home
- Increased cash-flow can be earned by charging tenants additional payments
- Better tenants are attracted to rent-to-owns
- Tenants assume a certain amount of property management
- A non-refundable deposit acts as safeguard for seller
- There is a defined exit strategy
- The sale price is determined at outset.
3 advantages of rent-to-owns (for buyers)
- Tenants have a clear home ownership strategy
- Minor renovations/upgrades are acceptable during the tenancy
- Buyers are guaranteed a place to rent for the length of the contract
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