There seems to be a lot of confusion over this topic which makes it ideal for us to look at this week.
A rent to own is where an agreement is reached between a landlord and a tenant in which the tenant would have indicated their interest in purchasing the property within a pre-determined time.
Who would consider this type of an arrangement?
As far the landlord is concerned there are a couple of reasons. We have all heard the horror stories of properties left in shambles by careless, even destructive, tenants.
If a landlord knows that the person they are doing the rent to own with is planning to purchase the property, it stands to reason that the property will be better taken care of.
They get the peace of mind knowing that their property is in good hands. Secondly, there is financial benefit. If for some reason the tenant does not finalize the rent to own agreement, the agreements generally allow the landlord to keep a part or all of the deposit.
As for why a tenant would consider this, there are any numbers of reasons. Perhaps an illness or other life issue caused the credit to decline to the point that the dream of home ownership is two or three years away.
Perhaps they have not yet saved the 5% down.
No matter the reason you definitely want to read the dos and don’ts of the rent to own.
It’s so important to make sure both parties are protected by a well laid out agreement. I would strongly encourage you to seek legal counsel to protect your interests no matter which side of the fence you are on.
1. Get pre-qualified – if you are considering this agreement because your credit is damaged then you certainly want to make sure you know exactly which steps you will need to take to re-establish sufficiently. Lenders like to see two trade lines (credit card and a vehicle loan for instance) reporting perfectly for two years before they will offer you a mortgage.
You also want to make sure that you are able to afford the property given your affordability ratios.
As the landlord, with written permission, the mortgage professional will be able to offer some assurance that you are not wasting your time. That the client will in fact be in a position to purchase down the road.
2. Deposit – an initial deposit on the property will be required. The agreement will lay out exactly how much it is and whether or not it is refundable if it does not end up closing. Keep a copy of the cheque and the bank statement showing it clearing the account. It may be required.
3. Additional amount towards the down payment – the entire monthly rent cannot be applied to the down payment. You must set the larger amount as going to the rent and anything additional will count towards the down payment. The agreement should also address what happens to the additional funds should you not proceed.
4. Property value – property values can be volatile and it is darn near impossible to know where they will be in 24 or 36 months. If you agree on a price of $300,000 and at the time of purchase the home is worth $250,000 you will be unable to obtain a mortgage for the original amount agreed on. Even if both parties agree to the purchase price a lender will not allow it. To protect everyone you should agree that the property’s value will be determined at the time of purchase by an appraisal from a mutually acceptable appraiser. The tenant is protected against the price falling and the landlord will get fair market value if it increases. That’s a win.
Taking the time before you sign and getting proper legal and mortgage professional advice can save you oodles of headaches down the road and more importantly save you money.
Pam Pikkert is a mortgage broker with Dominion Lending Centres – Regional Mortgage Group in Red Deer.