One of the questions that I get quite frequently as Toronto Real Estate Agent is about rent-to-own. I thought this article would be helpful.
The concept of rent-to-own can be a very effective way for a home buyer who does not have enough of a down payment, or the right credit score, to buy a home. It allows you to make the purchase over time at a set price.
The concept of rent-to-own can be a very effective way for a home buyer who does not have enough of a down payment, or the right credit score, to buy a home. It allows you to make the purchase over time at a set price.
But you have to be careful. Without due diligence, problems can occur for everyone involved.
In a typical
rent-to-own arrangement, the owner and tenant sign an Option to Purchase
agreement, where, for a fee, the tenant acquires the right to buy the
home two or three years later, at a set price. The fee is usually 2 to
2.5 per cent of the purchase price. The tenant pays the rent each month,
plus another amount towards the down payment.
Ideally, this comes up
to 5 per cent of the purchase price by the end of the contract.
Hopefully, by then the tenant has improved his credit score and
qualifies for an insured CMHC mortgage, and the deal closes. A benefit
for the landlord is that most tenants who have this option will take
better care of the home, since they expect to become the owners.
Problems can arise
when a middle man offers to get between the home owner and the
rent-to-own tenant. The middle man offers to manage the arrangement for
the owner for a fee and may also guarantee the owner a sale if the
tenant doesn’t buy it.
If the middle man is a
scam artist, he disappears with the fee leaving the home owner and
tenant wondering who owes what to whom and their rights.
An Ottawa company is facing lawsuits from tenants, owners, lenders, investors and contractors involving a rent to own business.
Golden Oaks
Enterprises, and its owner, Jean-Claude Lacasse, acquired 48 properties
in the Ottawa region using the rent to own method. As reported by CBC,
in one case, Golden Oaks agreed to buy a home but couldn’t find a
tenant and backed out of the deal. The seller had already purchased
another home and then had to carry two homes.
In another case, a
tenant who made the down payment was evicted when an investor with a
second mortgage took over the property. Meanwhile, investors put money
into Golden Oaks after being promised a 30 per cent return by investing
in rent to own properties.
The allegations have
not yet been proven in court, but a receiver has been appointed to
administer Golden Oaks affairs and it appears most of the investors will
lose everything. Lacasse‘s own home is up for sale as well.
Many tenants who
cannot qualify for a mortgage might be excellent candidates for a rent
to own contract. But they should remember these arrangements require the
same due diligence and protections as any real estate contract, to
avoid problems later.
Here are some suggestions:
•Any deposit sum paid
towards the final purchase price by the tenant should be held in trust,
similar to a normal real estate deal. It should not be paid to the
landlord or a third party, until the deal closes or terminates.
•Do your homework. For
a small fee, go to the county registry office and get a copy of the
owner’s title records, showing who actually owns the property and the
amount of any mortgages registered against title. Now you know you are
dealing with the correct owner. You should also ask for a mortgage
statement showing how much is owing on the property.
•Register the lease
and option agreement against title. This will protect the tenant from
future dealings by the owner with the property. In most cases, the
tenant will have to pay land transfer tax in order to do this, but it
should not be more than $100, so long as the option agreement is kept
separate from the lease, since land transfer tax is only payable on the
price paid for the option, not the final purchase price.
Or just use a lawyer to protect everyone involved by doing the proper due diligence in advance.
Be suspicious of a
middle man who wants to buy an option on your home. Rent-to-own can work
for landlords and tenants, if everyone is properly prepared before
signing anything.
