There’s a divide in the Canadian real estate market: those that rent and those that own. Media and watchdog agencies report on home sales, condo ownership, and the rental rates in the GTA, but there’s an elusive third option lurking in Ontario’s real estate market: rent-to-own.
Rent-to-own, or lease options, can be a very effective way for a homebuyer with limited finances or a weak credit score to own a home. It allows the buyer to pay for the home over time at a set price. Homeowners typically use this option as an investment strategy or as an incentive to sell their home. On the surface, it seems like a mutually beneficial agreement for both parties so why aren’t more buyers turning to this option? Well, it’s complicated.
The deals are exactly as they sound: the seller rents to a tenant for a set amount of time. A portion of their monthly rent goes toward the purchase price of the home. The prospective buyers put down an option deposit upfront, which is later deducted from the agreed purchase price. At the end of the lease, the tenant has the option to buy the home.
Example of Rent-to-Own Finances:
Things get a little more complicated when it comes to flexibility of rent-to-own deals though. Should the tenant decide the property is not suitable to purchase at the end of the term, the tenant will lose their option deposit and, depending on how the contract is written, they could also lose the money that was put aside for the down payment. Rent-to-own agreements are rigid from the seller’s perspective too—tenants can walk away from the deal at any time whereas the seller is bound by the terms of the purchase agreement, which means they can’t raise the selling price in the future to match appreciation in real estate markets.
Though rent-to-own agreements are rigid in nature, they are the best option for some prospective homebuyers. In metropolitan cities with soaring real estate prices, more buyers are looking to rent-to-own opportunities or versions of this agreement to break into the housing market. Vancouver property developer Bosa Properties has come up with their own equity plan to allow tenants that would be paying high rental prices anyway to put a portion of it toward the purchase of a new condo, an option some millennials feel is their only avenue to home ownership. With real estate appreciating at the rate it is, sales prices are likely to keep climbing which means rent-to-own purchasers could stand to benefit from the agreements.
For buyers considering the rent-to-own option, it’s important to remember that if there is a credit situation that is keeping you from purchasing a home right now, you’ll still need to resolve it by the end of your agreement. In many cases, you will be responsible for the maintenance of the property so be sure you’re really in love with a property before committing to this type of agreement. Don’t use this a chance to ‘test out the neighbourhood’ as some realtors might advise—you can accomplish that by renting without forgoing any deposit. Most importantly, be sure to have a lawyer review all documentation when entering into a rent-to-own agreement.
For investors and homeowners considering this selling option, you will have to put initial due diligence on choosing your tenants like a landlord might, as they still can walk away from the agreement at any time. That being said, this is a way to make money by investing in real estate; however, setting a price cap on the home could hurt your return in appreciating markets.