6 Aug 2015

Rent to Own

Rent To OwnThere seems to be a lot of confusion about what exactly a rent to own is, so let’s clarify!

A rent to own is where a landlord and a tenant agree that at a certain time the tenant will purchase the home from the landlord. So is it a good idea?

We have all heard of horrible tenants absolutely destroying a property. A rent to own agreement can help guarantee that the tenant is serious about taking care of the home. The landlord then doesn’t have to worry as much about their property and also can benefit financially. The landlord will never lose out on a rent to own agreement because their home will either be purchased for a fair price or the tenant will decide to not finalize the agreement, in which case the landlord will get to keep part of the entire deposit.

A tenant may consider a rent to own agreement if there is a life threatening issue, death, credit issue, or a failure to save a down payment in the family. In any case, it’s always important to read the fine print of a rent to own agreement to ensure the satisfaction of both parties.

The first step in a rent to own agreement is to consult a lawyer and financial professional. You need to get pre-qualified when considering a rent to own especially if you don’t have stable credit. These professionals will need to see two trade lines, such as a loan or credit card, with consistent payments for the past two years. You will also want to ensure that you are able to afford the property according to your affordability ratios.

A landlord also benefits from visiting a financial professional if you have written permission, as they will be able to tell you if the tenant is in an appropriate financial position. The key things a landlord should require are:

  1. Deposit – In the agreement, a deposit date and amount should be specified. The landlord should also keep a record of the bank deposit on file.
  2. Additional amount towards the down payment – The large monthly rent will remain, but anything additional can count towards the down payment. These details should also be outlined in the agreement.
  3. Property Value – Property values are volatile and hard to predict. If you agree on a price of $300,000 and at the time of purchase the home is worth $250,000 you will be unable to obtain a mortgage for the original amount agreed on.   Even if both parties agree to the purchase price a lender will not allow it.  To protect both landlord and tenant, the agreement should include a statement that the property value will be determined when the purchase date arrives and how it will be appraised.

If you are considering a rent to own agreement, come chat with one of our professionals at Dominion Lending Centres. We can help you sort through the confusion, saving you time and money.

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Alim Charania

Dominion Lending Centres - Accredited Mortgage Professional
Alim is part of DLC Regional Mortgage Group based in Red Deer, AB.

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