It’s safe to say that most people, given the opportunity, would choose to own a home rather than pay rent. Home ownership is an investment that nine times out of ten pays off. It builds equity that can be accessed for any number of things such as education, purchasing other assets, investment and even a legacy for one’s children.
Renting provides all of the same things, but for someone else!
It is increasingly difficult to get on the property ladder for the first time due to greater restrictions from government than ever before, high interest rates and the cost of living taking every spare penny so that saving for a down payment is very difficult.
Rent-to-own programs allow for the possibility of becoming a home owner and hopefully ahead of an otherwise lengthy timeline. Renting with the ability to purchase in the future.
Rent-to-own allows a buyer to enter into an agreement with an investor that will see that buyer able to purchase the property being rented within a short space of time.
If a rent-to-own company is involved it’s usually 3 years. It can be done privately between a current landlord and current tenant but that is generally not how it works. This is because there is risk involved that a landlord may not want to enter into, especially in the current housing market where tenants abound and houses can be sold rather quickly.
Rent-to-own companies, however, are facilitators of investment and the program can be a great way for an investor to get a return on money in a somewhat quick time frame. The tenant is able to choose the property to be purchased by the investor and later by the tenant himself.
The first thing to note is that the tenant/future buyer will need to have some money to give to the investor. This is crucial information because without this component, it won’t work. Rent-to-own companies can require between 3% to 5% of the purchase price to be paid by the tenant up front. These funds are then set aside by the investor and added to by the tenant with a monthly sum on top of the agreed upon rent, that will be added to the initial funds from the tenant and will provide a down payment for the tenant to use after the 3 year period.
The investor and the tenant also agree, up front, as to what the purchase price of the house will be in 3 years time. The rent portion of the tenant’s monthly commitment will be used by the investor to pay the mortgage, property taxes and maintenance. So, the agreement between investor and tenant is two-fold, a rental agreement and a rent-to-own agreement.
Another factor that may play into the decision for or against rent-to-own is the credit of the tenant, if this is a reason why rent-to-own is the option of choice, then the investor may want to know that the tenant/buyer will have improved their credit enough to purchase the property in 3 years. Some investors want to monitor credit to make sure that it is moving in a positive direction, especially if current credit is particularly bad.
Scenario #1 – Our Ottawa client would like to get on the property ladder but has very poor credit with large debt and/or lower down payment.
The Rent to Own company reviews the client’s ability to pay a monthly “rent” payment and if it looks viable the process can proceed. An investor is found who will buy a house and rent it to the client for a specified period of time after which the client buys the house from the investor.
This house is one of our client’s choosing at a specific price point so that in the end our client is buying the house that he really wants. The monthly payment is set up so that a portion of it is held in an account and at the end of the contract period the client uses that portion as a down payment to buy the house from the investor.
The investor makes money on the investment when at the end of the contract he has a buyer in place (the client) who will buy the property at a price agreed upon when the contract is set up. Our client, who has had time to repair his credit, can now qualify for a mortgage and then becomes the owner of the house he wants to own.
Scenario # 2 – Our client has a home and a mortgage. The mortgage is due for refinance and the client can no longer qualify for a mortgage due to very poor credit and large debt and will lose the home.
An appraisal is done on the property and an investor is found who is willing to buy the house for the appraised value from our client. The client’s debts are paid from any equity in the home and then the client remains in his home, paying rent as in scenario 1 in such a way that at the end of the contract period the client has a down payment to be able to buy his house back from the investor. By this time his credit is repaired to the point where he now qualifies for a mortgage.
Scenario # 3 – Our client has a home and a mortgage, the mortgage is not due but the client has debts which are going or have gone to a collection agency and the client is going to lose the home.
Scenario # 4 – Our client has a home and a mortgage, has fallen on hard times, and has been unable to pay the mortgage and is going into foreclosure and will lose the home.
Scenario # 3 and Scenario #4 follow the same pattern as Scenario #2. The key to all of the above is that the client’s credit is repaired to the point of qualifying for a mortgage at the end of the contract period. If not, then the client forfeits the house and the accumulated funds held for the down payment.
The client also agrees to undergo credit counselling and having his credit checked regularly over the course of the contract. The investor wants to make sure that he has a qualified buyer for the house at the end of the term.
We will also recommend a debt settlement company to reduce the amount of the client’s original debt as much as possible. The house must be kept in good repair. Our client will only be responsible for the rent payment. Taxes and insurance will be the responsibility of the investor. This is a good solution for those who would otherwise not be able to become homeowners or who might be about to lose the house that they love.
Gord Davis works with the best Rent To Own companies in Ottawa and all of Canada and can help by setting you up with the one that best meets your needs for your location.
Rent-to-own allows the tenant/buyer to choose the house that they will eventually own and to live in the house during the rental period.
There will be a monthly rental payment and an added payment that will be set aside of 3% – 5% from the tenant/buyer, along with an initial investment, to provide a down payment at the end of the term.
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