Posted on
March 29, 2014
by
Lawrence Cuming Sells Calgary!
Calgary Real Estate
This is a great article from Remax of Western Canada on the risks of the Rent-to-Own scenario. If this is something as a buyer that you are thinking about please read on. This may save you as a buyer considering a rent to own scenario a lot of money in the long run. If you have any questions on Rent-to own VS Buying please feel free to give me a call, I would be more than happy to answer all your questions.
Lawrence
Rent-to-own or lease options on homes are exactly as they sound. A homeowner rents to a tenant and the tenant has an option to buy the home for a predetermined price at the end of the lease.
On the surface, it seems like a mutually beneficial agreement – the homeowner has a deal to sell the house and the tenant can apply their rent to the purchase price while saving up for the down payment.
But is it a good idea? Frank Petriglia, a real estate broker with RE/MAX Premier Inc. in Vaughan, believes that more often than not, a lease option agreement benefits the homeowner.
One reason is that the homeowner is taking very little risk and has a fair degree of leverage. Because there few opportunities for tenants looking to buy, homeowner can demand a higher price than he or she might otherwise get.
In most rent-to-own scenarios, the tenant pays more rent than normal, with a portion going toward a downpayment. The extra money acts as something of a forced savings plan for the tenant, Petriglia says, adding that the option does give some people a way into the market, albeit at a slightly higher cost.
Tenants are also typically required to put down a deposit of about 5 per cent of the final sale price – which will be held by the homeowner and applied to the price of the home at the end of the lease option.
Tenants are also typically required to put down a deposit of about 5 per cent of the final sale price – which will be held by the homeowner and applied to the price of the home at the end of the lease option.
Here’s an example: The owner wants to sell the house for $200,000. The house typically rents for $1,000 a month. After a $10,000 deposit, a rent-to-own tenant might pay $1,300 a month – with $300 going toward the downpayment. On a three-year lease, the tenant would have paid $10,800 toward the downpayment. Add that into the initial deposit and the would-be owner will have $20,800 for a downpayment.
This can be attractive for those who can afford to buy a home, but might not quality for a mortgage. They may not qualify because of a weak credit score, or insufficient employment history. Their hope is that, by the end of the lease agreement, they will be able to qualify for a traditional mortgage from a bank.
The downside is that if a tenant decides to break the rent-to-own agreement, or decides the property is not suitable, they may lose their deposit, and depending on how the contract is written, may lose all the money that was put aside for the downpayment, or they might receive a very small portion back.
Additionally, in some cases your agreement may be void if your rent payment is late, or you fall behind in payments, putting your deposit at risk.
Additionally, in some cases your agreement may be void if your rent payment is late, or you fall behind in payments, putting your deposit at risk.
Petriglia suggests that many people in this position are better off renting and waiting until they can qualify for a traditional mortgage.
“I would rather see a homeowner start an RRSP to save the downpayment, take advantage of the tax credit, then cash it out for the downpayment and replace the money within 15 years,” he suggests. “By taking this route, you’re still in control of your money.”
However, if you do decide to enter into a rent-to-own agreement, it is important to get a lawyer to review any contract, and explain the pros and cons before you sign on the dotted line.
“It could cost you tens of thousands of dollars for a mistake, but it costs $500 or less to have the contract reviewed up front,” Petriglia says.
Rent-to-own home ownership can be risky for those who don’t understand exactly what they are signing up for.“A change in life circumstance – whether personally or financially – can have a huge impact on your ability to continue paying that rent premium or sticking to your rent-to-own lease obligations,” Petriglia says. “Should anything happen the consequences can be devastating.”
