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The Ultimate Guide for Rent to Own in Canada

Is rent to own really worth it? Let's see what Chaunyce Thomas our Real estate columnist has to say about the rent to own path to homeownership. Continue reading below to see if this method is all hype or worth it.

Can you believe 20 years ago the average GTA sold price was $229,00.00? If we look at even 10 years ago Real Estate sold prices were approximately $395,000.00. That’s a significant difference of $166,000. Furthermore in the first Quarter of 2021 average sale prices have risen to on average $1,045,488.00. What is even more astonishing to realize is as the cost of living has raised the average wage can not compare.

Real Estate is the talk of the town and the demand in the market is even more enormous than ever. The biggest factor plaguing GTA Real Estate in 2021 is the lack of inventory. Over the months we have been faced with much less inventory compared to previous years and where there is a lack of supply, demand and price increases.

With market prices seeing an all time high, those looking to get into the market are trying to find some intriguing ways to get a home without being house poor.

Let’s explore some  must know tips regarding “Rent To Own” in Real Estate. It’s important that you fully understand what you are signing up for if you enter into a rent to own arrangement in Ontario. Be sure to speak with a mortgage specialist and financial advisor before you take any steps to enter into a Rent To Own agreement.

                                    What is a Rent To Own Arrangement?

A rent to own arrangement is when a tenant who has contractually obligated themself  to buy that property, pays rent every month to the owner/landlord, just like you would as a tenant. However, with a rent to own program, a portion of the rent that is  paid goes towards your down payment for the purchase, with the intent to buy the home at an agreed upon later date.  In Ontario the rent to own program gives you the opportunity to grow your down payment while living in the home as if it were your own.

Rent to own  in Ontario offers home buyers the chance to be proactive in their purchasing endeavours and take steps to become homeowners regardless of current life circumstances that may have prevented them from buying the conventional way. Unfavourable credit and insufficient funds for an initial down payment tends to be the biggest hurdles that prevent those from finally having their name on the title of a property, but there are several more factors.

                              What is the benefit to a Rent To Own arrangement?

Typically Rent To Own terms tend to last anywhere from three to five years in length, depending on the specific situation. Anyone that is having a hard time repairing financial factors (low credit score, low income etc), this option gives them time to work on whatever is challenging the buyers purchasing power. This allows potential buyers the opportunity to have much better odds of being approved. 

Now in an ideal world the current tenant and further buyer will continue to pay an inflated rent amount and work on the factor that plagues them. When the contract for purchase comes due, the buyer will then apply for a mortgage and now they are in a position to get approved for the mortgage that they previously could not obtain.

In Ontario when entering into a Rent To Own agreement every detail must be stated in two different documents to make the agreement valid.

A) The lease agreement

B) Option to purchase agreement.

It is strongly advised, you should seek counsel from an independent legal advisor who can guide you through the rent to own contract before you sign on the dotted line.

Other areas that must be agreed upon when initially considering a Rent To Own are.

In addition to the term of the agreement as mentioned earlier, other details of the rent to own agreement should legally include:

• Monthly rent dollar amount
• Rental payment due dates
• The method that rent is to be paid
• Date for tenant to legally take possession of the property
• Both contract expiry dates
• Stating who is responsible for paying for utilities
• Final agreed upon purchase price of the property
• length of window of opportunity to purchase
• Agreeing upon the amount of the rent goes toward the down payment
• Clear stipulations on the down payment required

Rent To Own Arrangements are not for everyone and in fact they should only be strongly considered by only those in a serious housing crisis as there is a lot of risk. One of the best strategies to get any hopeful homeowner into the market is to rectify whatever the situation is that is making it difficult to acquire their own property. The factors that make the difference when applying for a mortgage, just to name a few are;
• Credit score
• Income
• Ongoing liabilities
• Length of employment
• Citizen status etc

The other thing to give thought to is to simply consider widening the area you are looking to purchase in. The further from the major cities you are, typically the lower the price point. Be open minded regarding purchasing a rental income property, that is located in up and coming areas, but talk to a professional who can provide/explain a comparable market analysis about the suggested communities. Perhaps you weren’t considering a further location but this option might give you the opportunity to get into the market rather than not and missing out on, on average a +6.3% appreciation on your investment year to year (the average is based on a 35 year cycle). Consider areas with convenience regarding transportation, and multiple reasons why any potential tenant would want to be in the area ex schools, lots of jobs, transportation etc

                                          What is the downside to Rent To Own ?

More important than the positive in a rent to own agreement, it is my job to educate you on the flip side and that is the downfalls of entering into a rent to own contract.

•If you don’t pay your rent on time, you could lose your right to purchase, you really are at the mercy of the active current homeowner.

•There may be issues with the house that you’re unaware of. In the process of rent to own it is very typical that once the tenant agrees to the rent to own contract the current homeowner usually has nothing to do with repairs, maintenance and upkeep. Those activities now fall on the tenant. It’s only when the home purchasing timeline approaches that you would exercise your right for a home inspection or appraisal. If damages are discovered the hopeful homeowners are left in a difficult place as they have spent years in a contract to hopefully own this property.

•You could be the victim of a rent to own scam if you don’t do your due diligence.

•If you don’t follow through with the purchase of the home, you would forfeit all the lump sum of money/ rent that would have gone towards the down payment and therefore the equity in the property.

•Potential owners don’t have as much control over the property since it’s not yours, so you might not be able to make any alterations although you are in an agreement to purchase.

•If the property value falls by time the tenant is contractually supposed to exercise the right to purchase, it’s likely the tenant may not be able to renegotiate the current lower market price.

If you are considering a rent to own option and you are a homeowner please reach out to me and I will happily educate you on everything you need to know to make an informed decision. For all my buyers looking for a way to get into the market but you're not sure how, let my team and I guide you to your goals, give me a call today.

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