How does Renting to Own a Home Work in Canada?April 04, 2023
For many Canadians, coming up with the money for a down payment can be the most difficult part of purchasing a home. For this reason, many are looking for alternative ways to purchase without a down payment. One of these ways is by going for a rent to own arrangement.
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You may be wondering how exactly renting to own works? Well, basically how it works is a portion of your rent every month goes towards purchasing the home. The actual terms of the agreement will vary depending where you live and who you are renting to own from but in your rental agreement it is specified that you intend to purchase the home at the end of the agreement. The portion of your rent payments as well as a possible eventual down payment will have to be paid at the end of the term. While this process doesn’t necessarily negate any payments up front, the money required up front is significantly less than a normal down payment. By paying the majority of any down payment over time you are reducing upfront costs as well as living in what could be your forever home.
Types of Rent to Own Agreements
When it comes to renting to own (RTO), there are two main types of agreements: lease option and lease purchase.
The lease option agreement allows the tenant to decide at the end of the agreement if they are still wanting to purchase the property or not. This agreement does prevent the seller from selling to someone else. The choice is completely up to the buyer. That being said, the money that has been put towards the down payment is to be kept by the seller. This means that money is now just considered rent.
The lease purchase agreement means that the tenant agrees to purchase the property at the beginning of the rental agreement. This is the most commonly used contract because then the homeowner has a guaranteed buyer. This is also protecting the buyer since the seller will be unable to sell the property to anyone else. The only situations in which the buyer can back out are the inability to secure the money from the bank. The agreement can also be ended if there is a breach of contract.
With both of these types of agreements, the purchase price is defined at the beginning of the contract so, even if the value of the home changes, you will have to pay the previously agreed upon amount.
Renting to Own in Different Provinces
When you are renting to own in Canada, the process is relatively the same no matter where you live. There may be some small distinctions per province, but in general the process is the same. The two different types of agreements are available when you rent to own. Which one the seller chooses will depend on which one they prefer. In some provinces, one standard agreement is used more than the other but whether you are in Ontario, Alberta, Nova Scotia or even B.C, the basic laws are the same. This is the case in any province really. Rent to own properties in Canada are still pretty rare so there isn’t a ton of distinction.
When you are choosing to rent to own in Canada, you will be asked to sign two different agreements. One is the rental agreement and the other is the rent to own agreement. These can be done directly through the owner or a rent to own company. No matter who you do it through the terms of both the rental and the RTO agreement will be listed here.
With most RTO contracts, you are required to put a down payment down. How much that payment is though, depends on the agreed upon sale price as well as the percentage the seller chooses. On top of this down payment there is also another fee. This is called the rent to own options fee and is usually between 1%-5% of the purchase price. This fee essentially buys you the option to purchase the property in the future. Keep in mind though, the lower the down payment and option fee are, the higher the rent payments could be, as well as the remaining down payment at the end of the term.
When it comes to the term of the contract, the length is normally somewhere between 1-5 years. The most common length for rent to own properties in Canada is 3 years. As we mentioned, with the average contract, no matter the length, the purchase price is usually based on the current value of the home. In some cases, the seller may choose to put in the contract that it is to be based off of the future value of the property. No matter which option is chosen, this also helps them to decide on the rent payments and your rent credits. These are usually 15-25% of the rent payments.
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Maintenance on Rent to Own Properties
Maintenance is one of the ways that RTO properties can be more expensive than purchasing the traditional way. In the case of any rent to own repairs, property taxes and any other fees, the majority of the time they are to be paid by the prospective buyer. This is often negotiated into the contract before the agreement is finalized. When considering a rent to own program, these are the fees you need to consider before you agree to anything.
Pros and Cons of Renting to Own
Renting to Own instead of just renting is a big decision. Before you make a decision like that, you want to be sure that you have all of the necessary information. We have put together some of the positives, as well as the negatives, of renting to own in Canada.
The main draw of renting to own is that it allows the buyer to fix their finances while living in their future home. It also allows you to fix your credit during this process. You don’t have to come up with the entire down payment right away and it allows you to save more money to help with your mortgage approval when it comes time to purchase.
Even though there are some positives when it comes to renting to own, there are some negatives that you should consider. This is because the circumstances are substantially different from the traditional method of purchasing. With a rent to own, you are unable to get a home inspection before signing the agreement unless you are able to negotiate it in. This could lead to a lot of issues in the future.
With a RTO property, if you choose to back out of the agreement or miss a payment, you could lose all of the money that you have already sunk into the purchase. In some cases this situation could hinder your financial situation more so than helping it.
The final thing you should consider before entering into a RTO agreement is that the finalization of the agreement is contingent on you qualifying for a mortgage. Even if you meet all of the other requirements and make all your payments, if you don’t qualify, you will lose everything that you invested into the home.
When you are signing a rent to own agreement, keep in mind that they are likely going to be longer detailed documents. This is done not only to protect the interests of the seller, but also to protect the interests of the buyer. The contract will state specifically what the terms of the agreements are, if those terms are breached at all then the contract will be void.
Here is an example of what a contract may look like.
The things included in this contract will be things like the:
- Property address
- Property description
- Who is responsible for what fees and maintenance (usually the buyer)
- Down payment amount and option fee
- Purchase price
- Rental amount
- Rental credit amount
- Important dates such as the last day to purchase the property
Low Monthly Payments on Rent to Own Homes
When it comes to rent payments on a rent to own, you actually pay above market rental prices. This is because part of your rent is going towards your down payments. For this reason, RTO properties can be more expensive in the beginning. The more you put towards your down payment, the less you will pay in the long run.
Rent to Own for Sellers
Renting to own is the same for buyers as it is for sellers, there are many positives but there are also many negatives. Before you choose to rent to own your home you should make sure you know the risks as well as the rewards.
This process comes in handy for those who are having a hard time selling their home or don’t want to lose money waiting for a buyer. This process allows you to obtain a buyer who traditionally may not be able to purchase the property.
With this process you get a nonrefundable deposit on the property. You also can still collect your monthly rent payments as well as the deposit amount that will be put to the side. Even though the buyer will be able to back out after the term of the agreement, most buyers avoid that since they have already sunk so much money into the property.
One major downside to an RTO agreement is that, while the agreement is in place, you still own the home so you are still responsible for a lot of things attached to that home. In most cases the renters will take care of things but that isn’t always the case.
You also have to keep in mind that the home may not be kept in the same condition that you rented it in. If this is the case this really only becomes an issue if the prospective buyers back out of the agreement or they miss their rent and the agreement is terminated.
With a RTO agreement, the finalization of the agreement depends on the bank agreeing to the loan for the property purchase. If this happens, the prospective buyer is let out of the agreement often without penalty. You do get to keep all of the money, but you then have to figure out another way to sell your home. It could have potentially fallen in value since then and you could lose more than you gained.
How to Prepare For a Rent to Own Purchase
If you are looking at renting to own because you don’t qualify for a current mortgage, that’s okay. A rent to own can help make your goal of owning a home become a reality. That being said, you don’t want to fly blind into an agreement like this. You could use a lot of money.
Before you enter into a rent to own agreement, you should speak with a mortgage broker. Mortgage brokers will be able to help you break down what you are able to afford as well as give you advice on what you need to do in order to be able to make a purchase in the future. You can also speak to real estate agents and a lawyer to get advice on what the best option is for you.
Keep in mind when you are entering into a rent to own agreement, you are allowed to negotiate. As we mention that with some contracts you could be required to put the remaining down payment amount down right before the purchase. You can negotiate to have the total down payment amount that is remaining added onto your rental amount. This means that at the times of purchase you should have the total down payment and just need to meet the purchase.
When you are looking into renting to own just keep in mind that you can do your research, get advice and talk to professionals. When you are investing that much money into a home you want to make sure that you are able to finalize the contract.
Renting to Own Through a Company or an Individual
As we mentioned, there are two ways that you can rent to own a home. The first way is by negotiating with a current or potential landlord. Keep in mind that if you are negotiating privately that you still want to have a legally binding contract. This protects both you and the seller from losing any money.
With a private contact there is going to be more risk involved so you do want to make sure that you not only read the contract correctly before agreeing to it, but make sure the contract is legal and get a second opinion if you need to. This is a lot of money you are going to be investing so you do want to make sure that both parties are protected.
With a rent to own company it won’t hurt to do the same. It is still the same amount of money and you want to make sure that you are protected. If you are working with a rent to own company, they often have houses listed online that are available to RTO. These properties will have listed prices as well.
With rent to own companies, it is in their best interest for you to complete the sale. Because of this, they will often help you to secure a mortgage. If there are specific roadblocks in your way that could affect your approval odds, such as a low credit score, these companies are often able to help you. They do what they can to get you approved for the mortgage and often work with lending companies. In some cases, your approval odds could work out better using a rent to own company just because of the added layer of support.
Rent to Own Insurance
Unlike when you are purchasing a home directly from the seller, insurance isn’t required. How rent to own works is, since you are considered to be only a renter during the term, you would have to get renters insurance in order to protect your belongings. The property is still protected under the homeowners insurance and any claims would have to be done by them, just like a traditional rental.
Renting to own can be a very complex process. In Canada, there actually aren’t many sellers who choose to rent to own. Many prefer to sell their homes the traditional way. That is why these rent to own companies exist, to help smooth out the process. Other sellers choose to rent to own their homes to renters that they are currently renting to. Either way, there are still risks for both sellers and buyers when it comes to using rent to own programs. If you do choose to enter into a rent to own contract, it is important that you do your research and protect yourself. Keep in mind though, that things happen. You won’t be able to prevent everything, but doing your due diligence and preparing yourself for all situations can be the key to success.