Should you rent to own?
Are you thinking about how you will ever be able to buy your own home? Do you think you’ll never be able to save up for the downpayment? I’m sure you’ve seen the ads for Rent-To-Own so maybe you’re wondering if this is the way to go.
Well, let’s talk about that for a minute or two. If you look at websites that talk about renting to own you’ll likely think this option is an answer to your prayers. But things are not always as they seem. There are some options, but let’s look at one common one. You talk to someone (usually someone with lots of money) and they determine that they like you enough (you’re credit isn’t too terrible) and they agree to help you out. Basically what they do is figure out whether or not you are reasonably able to pay the high rent they are going to charge for 3 years. If you have bad credit it still may be o.k. as long as you have strong monthly income and the ability to repair your credit. They’ll also want to know if you have any money at all to give them as a downpayment or else it will be extremely difficult to ensure your end purchase is successful.
A typical senario may be like this. You meet and they agree to help you rent to own a home. You and they determine a budget based on monthly lease budget, downpayment and eventual purchase price and you go shopping for a home you like. Once you find one they will try to buy it for you (or you may choose a home they already own).
So, let’s say you qualify, have the downpayment they require and have found a home. It can take as little as two weeks to months to get you into your home, depending on circumstances surrounding the purchase of the property by your new landlord. The legal documents will be prepared, including a lease agreement, occupancy agreement and an option to purchase. You should definitely have a lawyer look over these documents on your behalf. Most leases are for a three year term and, if at the end of three years you can’t purchase the home, the landlord will consider the circumstances and decide if they will allow you to get out of your contract. You will forfeit any rent credits and deposit monies.
If we look at a typical transaction, it could look like this:
- $275,000 home in the town of your choice within the Durham Region
- Three year lease term
- Monthly lease payment of $2,100 (includes property tax, but does not include utilities, tenant insurance or maintenance – those are extras that you will pay)$350 of this monthly payment will go toward your eventual down payment.
- Initial deposit of $9,000
- Option to purchse at end of year 3 for $324,000 + typical closing costs
- Combined credits of $9,000 and $12,600 go toward eventual purchase (representing over 6%)
On the average, home prices in Durham Region have been increasing 4% per year. If that were true in the above example (taken from www.housecents.ca) a house purchased at $275,000 this year would be worth approximately $309,337 in three years, but you would be agreeing to pay $324,000 for this home. All the senario above is doing is taking your original $9,000 and holding it so you can’t spend it, then saving $350 a month for you (in a non-interest bearing account) so that you would eventually have the 5% downpayment required to purchase a house. If you talked to a mortgage broker or finacial advisor or accountant, they could all likely tell you faster ways to improve your credit and save your downpayment. For instance, if you used RRSP’s and then saved up your tax savings and then withdrew from your RRSP when the time was right, you’d be able to purchase the home of your choice with your own money and not be paying inflated rents for three years.
We haven’t even talked about what would happen if the market declined over the next three years! You’d be agreeing to purchase a home for an inflated amount that is not supported by current market values and if you walked away from the deal, you would loose the $21,600 you had paid toward the house you had been renting for three years. Do you see how this system definitely benefits the owner of the home and not you?
I’m not saying that this situation never works out. It’s been an option for years and will likely always be an option for some people. Just remember to keep your eyes wide open when you are looking into these contracts. Have a lawyer review the forms for you and check out all other options available before you sign on the dotted line.
Want more information? Please call or email me.