Do those 'rent to own' housing deals ever pay off?
If you've been in the U.S. recently, you've seen the signs, generally at large intersections: “Rent To Own! No Financing Necessary! Call Now!”
While these offerings are nowhere near as common on this side of the border, several small Canadian companies are using them to entice prospective homebuyers into the market.
Ottawa-based Rent 2 Own Canada, for instance, claims to help first-time buyers to work towards ownership without a huge investment. Same with Calgary's Rent Faster. And then there's a stack of offers on Craigslist as well.
But is this really the way to go if you're strapped for cash or have a shaky credit history? Or are the deals simply too lopsided?
Usually, the seller gives the tenant the right to buy the house at some point in the future, usually one to three years out, for a price that's agreed upon today, plus a fee that will keep the option of buying open.
So, if a home might normally rent for $1400/month, a rent-to-own tenant might pay $1600, a portion of which would be credited to the tenant for an eventual down payment, assuming they ever get that far. If not, expect to kiss the phantom 'equity' goodbye.
During the rental period, the landlord still owns the home and is legally responsible for it, but the renters are expected to maintain the property as their own.
If you're going this route, do the numbers a couple of times. Make sure that the owner provides you with a title showing that they have full and total authority over the property, and can actually to sell it to you, warns broker Canadian Mortgages. And make sure you see mortgage paperwork every single month that you live in the home.
This way, you can be sure that the mortgage is getting paid, you won't be evicted in the meantime and the place will still be there when it comes time for you to own it.
Have you been involved in a 'rent-to-own' arrangement? How are things working out? Do you know any tenants who've actually came out ahead?
By Gordon Powers, MSN Money
Posted by: John | Oct 5, 2021 11:03:43 AM
In response to Mike: In Canada market rent is determined for the unit. The tenant must pay market rent. Anything the landlord and he agree to have paid over the market rent is recognized by banks and mortgage insurers as a legitimate downpayment. No sneaky stuff, it is all documented. The buyer/tenant must of course qualify for any mortgaging required.
As for the pros and cons. Trying to predict realty prices in the future is a crap shoot even for professionals involved in the business. There are numerous ways to structure the transaction such as an appraised value when the home is eventually purchased. This is usually the best bet, the home has to appraise properly so affixing a price in the past or future may not be in line with current appraised value. Something the bank is surely going to want.
The landlord benefits if the Tenant/Buyer walks away from the transaction, he also takes some risks if the property has not been maintained, he also faces some risk under local jurisdictions and laws in place to protect tenants. Rent to purchase tend to complicate matters if an eviction becomes an issue. Generally speaking the Landlord gets use of additional cash flow, has the prospect of perhaps keeping the additional rent is the tenant walks on the deal. These have been also structured where some of the over payment of rent is rebated back to the tenant.
Rent to Own is not for everyone. Tenants may have a better advantage in these economic times and what with all the woes in the realty market. Have the agreement looked at, try to think of any eventualities. Make sure you like the house area, town etc...
Posted by: Brad | Oct 5, 2021 4:01:45 PM
Back in 1995 this is how I managed to get into the housing market with no money down (other than first and last) and it worked out just fine. After 3 years the down payment, which was applied partially from the monthly rent, totaled 10% of the agreed upon purchase price (which was also well below market value by the time 1998 rolled around) and getting mortgage approval was easy, although admittedly my credit was sterling which certainly did not hurt.
The key was dealing with an honest builder, making sure that the price agreed on for the house in 3 years was realistic, and making certain that everything was in writing and approved by my lawyer. Had I chosen not to purchase the house at the end of the 3 year period I would still have been no further behind than if I had continued to rent. Being young and not having a substantial down payment at the time, combined with the uncertainty of everything involved with owning and maintaining a house, made this a perfect option for me. Oh, and did I mention that the house was BRAND NEW? No nasty repair surprises.
Posted by: jerry | Oct 5, 2021 5:56:31 PM
as a owner I think it would make more sense to offer the 5 % down as incentive and sell at the market value and avoild the realtor fee.
Posted by: Maggie | Oct 13, 2021 2:11:16 AM
Gee Mike you sound bitter and I basically did dispute, or should I say; explained, that it can be a win-win for both tenant and seller if structured properly. Take a deep breath - relax - and re read my post. Remember due dilligence is always required in any real estate purchase and your extensive research is not very extensive.
Posted by: buy and sell | Nov 22, 2021 2:44:21 AM
..I'm not a tenant that got screwed...I"m landlord that researched the concept and totally realized that this is not a good deal for the tenant whatsoever.
-maica