By now, the term “rent-to-own” is probably familiar to you, but you might still be wondering: how does rent-to-own in Canada work?
The rent-to-own option is a term used for a specific arrangement program that allows you to rent a property with an option to purchase it in the future. The specific terms and conditions of this agreement will vary, but the general aim is to provide an option for renters to eventually purchase a home, if doing so right now is not financially possible.
Under rent-to-own home plans, a portion of rent is set aside each month, referred to as rent credits. These credits will eventually go towards the down payment of the property.
These arrangements may vary in their specific terms and the obligations of either party. For example, your lease agreement may not stipulate that you must purchase the home, but typically, if you elect not to go through with the purchase, you will likely lose those accumulated rent credits. The duration of these agreements generally spans anywhere from one to five years, with the option to purchase during the lease term or at its expiry.
For buyers, there are several considerations when it comes to committing to a rent-to-own contract versus a traditional rental agreement.
Rent-to-own contracts are generally offered in one of two agreement styles. In a lease option agreement with the rent-to-own option, tenants are within their rights to purchase the property at the expiry of the agreement. The other agreement structure is a lease-purchase agreement, which stipulates that the tenant must purchase the property once the terms of the lease expire. The primary difference being that under the first agreement, the tenant has the option to purchase, and under the second agreement, the tenant is committing to the purchase as a condition of the lease agreement.
For buyers who are not yet in a position to buy, but are apprehensive about putting money they won’t see any return on into a rental property, the rent-to-own option holds obvious appeal. It allows for the buyer to save and put money towards their down payment via their monthly rent payments. Typically, this will also translate to a locked-in purchase price, which allows peace of mind in knowing the price will remain fixed throughout the lease-to-own period. Of course, on the flip side of this, a locked-in purchase price could work against buyers if home prices fall in future.
For those buyers who are struggling to meet the financial criteria for purchase - whether they have been turned down for a mortgage, are working to build or improve their credit, or just save up funds - the rent-to-own option allows for the interim time needed for tenants to work on their financial situation.
Another perk of this kind of agreement for buyers is the ability to live in and enjoy the property as you save to purchase the property, which also translates to eliminating moving headaches or costs at the time of purchase.
For sellers, one obvious benefit of the rent-to-own agreement is having future purchasers in place. Even in the case of a lease agreement with a rent-to-own option, the accumulating rent credits and comfort for tenants of already living in the property is a significant incentive for tenants to exercise the option to purchase once their lease term is completed.
In challenging markets, sellers can eliminate the hassles and costs of listing a property and potentially leaving it empty for some time by bringing in renters with a rent-to-own agreement or option. This ensures money coming in for the sellers each month as they act as landlord, and the knowledge that the tenants in place will feel some pre-emptive pride of ownership and take better care of the property during their term of lease in anticipation of ultimately becoming purchasers.
While there are many benefits for buyers who opt to go the rent-to-own route, some considerations factor into this agreement. As with any agreement, certain restrictions do apply to the rent-to-home agreement versus the traditional process of buying a home. The property, during the term of the lease, is still owned by the landlord, meaning you will have to adhere to any landlord rules and stipulations for tenants for the duration of the lease. One example of this might be in regards to pets. If the landlord does not accept pets living in the property, tenants will have to accept and abide by this rule during their lease, or risk violating the terms of agreement and nullifying the contract. Under those conditions, tenants would likely lose the option fee and any rent credits deposited up to that point in time.
Another condition typical of the rent-to-own agreement is the stipulation that buyers must qualify for a mortgage at the end of their lease.
There are also some rent-to-own contracts that don’t include a home inspection clause, which could translate to some unexpected issues within the home that would then be assumed by tenants/future purchasers once they sign.
For those whose top priority would be cheaper rent payments, the rent-to-own route will likely not work, as this type of agreement allocates a percentage of monthly payments toward the down payment of the property, translating to higher rental payments than those found under traditional rental agreements.
For buyers, the rent-to-own program provides the opportunity to begin working towards a future property purchase today. The financial model for this program will allow for equity and credit building in order to qualify for future financing.
Ultimately, rent-to-own agreements and options present a great alternative to those hopeful buyers who are not yet in the position to commit to an outright purchase. Under the right type of agreement structure for all involved, and with careful consideration to all terms and conditions applicable to the agreement, both buyers and sellers can benefit from this option.
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