Homeownership isn’t the same for everyone. While some people choose the conventional method and go with a realtor and mortgage broker or bank, others choose private lenders. But what happens if you can’t secure a mortgage?
Perhaps your credit score is less than desirable, but you still make enough money to be able to comfortably afford a new home. Maybe you’re new to Canada, self-employed or you haven’t saved up enough money for the down payment. Other hindrances include a recent divorce or bankruptcy. While these scenarios sound like complete dead ends, they don’t have to be.
You don’t have to forgo your dream of homeownership – instead, you can rent to own.
Also know as a Purchase Option or Lease Option Agreement, rent-to-own can be thought of as a stepping-stone on the way to a more conventional financial transaction. The agreement is set at anywhere from one to three years, but can be set for as long as five years.
The tenant pays an extra amount on top of the monthly rent, which acts as “forced savings”. Eventually, these “forced savings” are applied to the down payment.
In the meantime, the landlord/investor can use this extra cash flow for whatever they want, as long as it is rebated in full to the tenant at the end of the agreement. Although no two agreements are the same, quite often tenants are asked to share in and help pay for maintenance and repairs. This helps prepare them for the reality of homeownership, should they choose it.
At the end of the rental term, the tenant has the option to purchase the property for a pre-determined price. An agreement is drawn up so that both parties know what to expect at the end of the term.
According to a recent article in Canadian Real Estate, here’s what’s included in the agreement:
The tenant does have the option to walk away if they’re not happy at the end of the term; likely they will lose their rent rebate.
There is no one set way that rent-to-own works. Sometimes the landlord/investor seeks out the tenant first and then buys the home. Sometimes rent-to-own properties are listed on special sites online. Start by doing an online search. You could also try calling local brokerages to see if they know of any rent-to-own homes on the market.
If everything is carefully considered, rent-to-own can be a really smart investment. Have a look at these two lists and see if the pros outweigh the cons for you.
Rent-to-own can be a viable solution for those who have explored traditional options for homeownership with no results.
If you do choose rent-to-own, make sure you know the risks beforehand. The seller must be someone that you trust.
Most importantly, make sure you know yourself. If you don’t think that you will have enough money to purchase by the end of the term, don’t do it. You have more to lose than gain.