What is Rent to own?

So you have been renting for a while now and have decided to purchase a property of your own.  You start shipping arround and the when you realize the prices are high, you decide maybe you should look at other options.  These days many people are offering Rent-to-own properties, which seem like a good replacement option.

Before entering into an agreement, the sellers decide the sale price and rent they'll charge for the house. Both amounts are subject to negotiation, just as a regular sale would be. But sellers and buyers need to remember that once they sign an agreement, the sale price of the house is locked in until the end of their rental term, between one and three years. Even if other housing prices rise or fall during that time, the original agreed-upon sale price is final.  This sounds like a good option for the buyers since the value of a property usually does go up over time.  But read on and I will show you how this is actually same if not worse than renting.

Buyers or more commonly known as Renters have to pay an option fee and then a rent premium.

The option fee is a set amount that the renter pays the seller. If, at the end of the lease period, the renter buys the house, the option fee becomes part of the down payment. If the renter doesn't buy the house, the option fee becomes income for the seller.

Rent premiums are an amount slightly above the typical rent, with a portion of that money going toward a down payment.

Here's an example:

The house is worth $200,000 

Typical rent would be $1,000 a month. Someone who's renting to own might pay $1,200 a month in rent and then receive a $400 rent credit each month.

Add the option fee, in this case $5,000.

On a three-year lease, the renter would earn $14,400 in rent credits. Adding the earned rental credits to the option fee, the renter has accumulated $19,400 for a down payment.

This does seem like a valuable alternative for buyers who otherwise wouldn't have the credit score or money saved to acquire their own home.  But here is the catch, with the CMHC 0% down program, a buyer can actually qualify to purcahse their own home with $0 downpayment, yes certain conditions do apply and you may contact me at any time to find out at mann@realtormann.ca.  But why would anyone want to Rent a property which the option of purchasing it.  Here, let's do the math again. 

Rent/month: $1200 ($24,000 per year)

Rent credits/month: $400 ($4800/year)

$24000-$4800 = $19200 Goes to the seller as income.

These numbers are based on one year terms.  Most Rent-to-own contracts are based on 3 year terms, so at the end of a term the Seller/Landlord just earned $57,600 of your hard earned money. 

Don't waste your money.  Stop paying your landlords mortgage, make the right choice and contact a Realtor today to find the right property for yourself. 

 

 

Maheep Mann

Maheep Mann

Sales Representative
CENTURY 21 Leading Edge Realty Inc., Brokerage*
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