Recently I have had many clients come to me and ask “how does your typical rent to own work?”
Rent to owns have been around for a long time but with increased exposure on the internet and lawn signs they are more visible than ever.
Here are the basics:
If a seller advertises that he or she will consider a rent to own deal, this means they will be looking for someone to lease the house with two contracts. The first contract is a typical lease and the other deals with the purchase of the property. It is very important that both contracts been signed. If only the rent to own (purchase) agreement is signed then none of the rules and regulation under the Landlord & Tenant Act will apply if you need to evict because technically they are not a tenant without a formal lease in place.
The rent to own or purchase agreement will be for a period of time agreeable to both parties (Seller & Buyer) typically anywhere from 1-5 years. It is a common misconception that the seller will simply set aside some of the rental money as a down payment contribution, but this is not exactly the case. The buyer will have to pay the regular amount of rent, and in addition they will have to pay a monthly installment that will be credited towards the down payment. (Canada Real Estate Advisor, 2013)
Each rent to own agreement is structured differently but typically there are clauses in the contract that state if the buyer is late or misses any payment, the contract is null and void. As well, the buyer may be responsible for repairs and maintenance; some sellers will write into the contract that they can keep any monies and or the deposit paid toward the purchase contract if the buyer is in default.
It’s important to keep in mind that house prices are always changing. The calculations for the purchase agreement are based prices when the contract was entered into, and it can be next to impossible to calculate what the house may be worth in the future given market conditions. (1-5 years down the road) This can be addressed by agreeing to a certain percentage increase for each year of the term, or sometimes sellers will ask the buyer to agree to pay the appraised value of the house at the end of the term. (In this case, you may have to pay a little extra at the end of your term to meet the 5% down payment.) The seller will typically want a minimum of $5000. (Typically less than the standard 5% banks charge)
In simple terms think of a car lease. You put a deposit down and make payments for specified period of time at the end of the lease you have the option to purchase the car for a predetermined price.
See blog post on Advantages and Disadvantages of Rent to Owns.