Articles on Buying All Articles

What is Rent To Own?

ADVICE Author: Steve Dyment

If you look through the classifieds these days you’ll often see headings advertising ‘Rent to Own’ programs. These programs often have several different names (Lease option, Lease to Own, etc.) but are all referring to the same thing: Rent to Own.

A Rent To Own (RTO) is a lease agreement between the owner of a property, and the person wishing to live in it (well call them the tenant) . In such an agreement, the tenant commits to making monthly rent payments over a fixed term, usually one to three years in length. A portion of the rent goes towards a future down payment for purchase of the property, which can be made at the end of the term.

In addition to monthly rent, the tenant also provides a up front payment, usually referred to as an ‘option fee’. Typical option fees are smaller than traditional down payments, and are usually about 2-5% of the total purchase price of the property. Since one portion goes towards the rental costs and the other portion is credited for the future down payment, the average monthly payment is usually higher than a typical rent for a similar property.

In exchange for the rent paid each month, the tenant gets to live on the property and has the option to purchase it at the end of the term. He is not forced to purchase the property, however, should he decline to do so the owner will keep the down payment.

An example:

Oscar (Owner) and Tom (Tenant)

Subject property: 4 bedroom house

Market Value: $400,000

Down payment: $8000

Monthly rent $2500 ($500 credit towards future down payment)

Term: 36 months

At the end of the term, Tom will have the option (but not the obligation), to purchase this home from Oscar for their agreed upon price.

Is Rent to Own for me?

The most suitable candidates for RTO are those who are unable to obtain a mortgage through traditional means, usually because they have poor or damaged credit, no down payment, are new to Canada or have recently gone into business for themselves.

What are the advantages?

For the Tenant:

- He has the opportunity to get into a home that he could not have purchased with traditional financing.

- A portion of his rent is put toward the final cost of the property. This forces the him to pay into his down payment, causing him to gradually accumulate his money for purchasing the home at a later date.

- The purchase price of the property is agreed upon at the time of purchase. Therefore, If the property increases in value before the end of the term, he can effectively buy the property at a discount.

For the Owner:

- RTO candidates usually make great tenants. They often see the property as their own house, and they treat it with better care and respect than they may with a rental property.

- Minor repairs (ex. $500 and under) are taken care of by the tenant, freeing the landlord from the time and money necessary for maintenance and repair.

- RTOs allow him to sell the home after receiving consistent rent for the duration of the lease.

Things to consider:

RTOs are nothing new. Though the practice has been around for many years, it has become increasingly popular in recent years due to flat or declining real estate markets.

-RTOs should not to be entered into lightly. The agreement is usually a legally binding contract, therefore, it is vital to consult with qualified legal counsel before signing a contract such as this.

One final thought: RTO agreements can differ widely. It is difficult to make statements that are true with all RTOs. This article is intended simply to help you understand the basic concepts of the Rent To Own program. If you have further questions or an interested in learning more about RTOs, please don’t hesitate to contact me.

Contact Information | Creative Mortgage Corp.
Name:	Steve Dyment
Company:	Creative Mortgage Corp.
City:	Kelowna
Province:	British Columbia
Country:	Canada
Phone:	(250) 470 9154
Email:	Email
Website:	http://www.creativemortgage.ca