‘Rent to own’ is a term that comes up pretty frequently in the real estate business. There has always been a bit of mystery and shadiness surrounding the phrase but in actuality renting to own can be a viable way of entering the housing market. Like so many things in life, ‘renting to own’ can get you into trouble on many fronts due to a poor understanding of what is involved, and more importantly failing to get solid legal expertise so that you have a contract that actually protects your interests.
As a Realtor it is my job to steer clients towards solutions that work for them and to advise them as best as I am able. A critical part of my role is deferring to other experts in the real estate field such as lawyers. My understanding of ‘rent to own’ is such a case; despite knowing exactly how it works I fully acknowledge that writing the actual contract called a ‘lease purchase agreement’ needs a lawyer’s scrutiny.
My role is to act as a guide and educator for my clients, establishing how the ‘rent to own’ process works and suggesting clauses and stipulations in a potential contract that will help my client get a home when the option to buy becomes exercisable. Making connections with other industry professionals on behalf of my clients and liaising with the landlord/seller is another duty, as is informing my clients of the responsibilities they will be undertaking when they enter into a contract.
Lease purchase agreements are a useful way for people with limited means and/or bad credit scores to enter the housing market. The purchase option allows the tenant the opportunity to save a minimal down-payment and repair damaged credit in the typical two or three years leading up to the exercising of the purchase option. During this period the tenant continues to live in the home uninterrupted until the purchase option (known as the right of first refusal) is exercised. Hopefully at that time the prospective owner has an improved credit score and is capable of arranging all necessary financing including closing costs.
Upon entering into an agreement the renter usually puts down a deposit and then makes monthly payments of rent and an additional monthly sum which is placed in an escrow account, to be used along with the deposit as a down-payment when the option to purchase is exercised. In Canada the minimum amount saved must be 5% of the purchase price, and high ratio mortgage insurance is automatically applied to the loan amount by the lender. In the event the renter can’t or won’t purchase the property the deposit is normally kept by the owner. The price to be paid for the home is fixed upon entering the contract, and any repairs prior to purchase usually become the renter’s obligation.
Obviously there are many risks with this type of contract. The owner may fail to make mortgage payments and lose the property, leaving the renter out of luck. Second mortgages can cause issues too, and if the renter fails to make rent by even one day they could lose the entirety of their deposit. The lease purchase agreement should be placed on title in the Land Registry Office for a minimal cost as this affords the tenant some protection against the actions of other parties. If the market turns downward the renter may be faced with the undesirable options of purchasing a property at above market prices or losing the deposit. Scam artists prey upon unsuspecting renters too, and anything too good to be true usually is.
In reading this it should be clear that the expertise of a Realtor and a lawyer are needed before any contracts are entered into. A Realtor will ensure that you are getting a property of fair value, and will guide you every step of the way including bringing in other experts such as home inspectors. A great Realtor will suggest the best terms for your contract and get you expert legal representation. A lawyer specializing in real estate is your best choice, and will work hard to protect your best interests just as I would. There are times in life where you really do need professional help and ‘renting to own’ is one of them. Don’t hesitate to call or email me, I’d be glad to help you.