August 16, 2018

Pros And Cons Of ‘Rent-To-Own’ Agreement

 Rent-to-own or lease options on homes are exactly as they sound.  A homeowner rents to a tenant and the tenant has an option to buy the home for a predetermined price at the end of the lease.  On the surface, it seems like a mutually beneficial agreement – the homeowner has a deal to sell the house and the tenant can apply their rent towards the purchase price while saving up for the down payment.

More than often the agreement benefits the homeowner and the homeowner is taking very little risk.  As there are few of these opportunities available, the homeowner can demand a higher price.  In most rent-to-own scenarios, the tenant pays more rent than normal with a portion going towards a down payment.  The extra money acts as a forced savings plan for the tenant towards their down payment.  Tenants are also typically required to put down a percentage of the final sale price as a deposit, which will be held by the homeowner and applied to the price of the home at the end of the lease option.

This can be attractive for those who can afford to buy a home but might not have the down payment and will therefore not qualify for a traditional mortgage.  The downside is that if a tenant decides to break the agreement or decides the property is not suitable, they may loose their deposit and depending on how the contract is written, may loose all the money that was put aside for the down payment.

Many people in this position are better off renting and waiting until they can save their down payment and qualify for a traditional mortgage.  However, should you decide to enter into a rent-to-own agreement, it is important to get a lawyer to review any contract and explain the pros and cons before you sign on the contract.

On a number of occasions, I have been asked by clients about the rent-to-own program.  While there are some benefits for both the purchaser and the seller, on the few occasions I have been involved in this program, I found CMHC had issues with using the additional rent paid towards the down payment and it is also an issue if the value was initially inflated. September 17th, 2012

Colleen Saunders is a Mortgage Agent serving the Toronto, Oakville, Mississauga and Burlington area


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