Juriscorp Law Explains Rent to Own Arrangement

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With home prices skyrocketing in Canada, homeownership can seem out of reach for most people. Things are not a lot more affordable in Alberta either; the average home price has increased 6.7% in 2024.

And with rental rates rising 13% year-on-year, renters are finding it hard to break out of the ‘rental cycle’ (the more you pay in rent, the less you save to own).

That’s where Rent-to-own comes in. It allows renters a pathway to homeownership, even if they don’t have the funds to make a substantial down payment, or have a poor(er) credit score than what lenders are looking for.

What is Rent-to-Own?

A Rent to Own agreement is a lease combined with the exclusive option to purchase the property after a certain amount of time. These agreements allow the renter/buyer to save up for a larger down payment over time and/or clean up past credit problems before purchasing.

But, a rent to own agreement can easily go wrong if the buyer doesn’t have proper legal knowledge when signing a contract. Buyers can end up losing a lot of money because they didn’t seek legal advice from a real estate lawyer when signing their rent to own contract.

The 4 Steps of Rent-to-Own

Here’s are the four stages in a Rent-to-own arrangement:

1.     Mutual Agreement – Both the tenant and landlord formalize a Rent-to-own contract outlining crucial terms such as the purchase price, option fee, and duration of the option period.

2.     Option Period – The tenant leases the property for a predetermined timeframe, usually ranging from one to three years. Within this period, the tenant holds the right to buy the property.

3.     Purchase Execution – Should the tenant choose to buy, they pay the pre-agreed purchase price. The option fee paid initially is usually credited toward the down payment, reducing the overall purchase cost.

4.     Property Transfer – Upon completion of the purchase process, ownership of the property is transferred to the tenant, who then becomes the new homeowner.

How Does a Rent to Own Agreement Work?

In theory, a rent to own agreement will allow a potential buyer who cannot currently qualify for a mortgage, or one who cannot make a large enough down payment on a home, work towards building up a larger down payment to help them qualify while renting the home.

For example, a potential renter will put down a small down payment of $10,000 on a home. If the rent for that home should be $1,500, the renter will pay $1,900 with the extra $400 going towards the down payment. By the end of a three-year lease term, the renter will have a $24,400 down payment, including the initial payment. The would-be owner can then use the new down payment to qualify for a mortgage.

Is it Right for You: Pros and Cons of Rent-to-Own

Before you sign a Rent-to-own agreement, you should know the pros and cons of entering such an agreement. Here are a few things to consider:

Pros of Rent-to-Own

One significant benefit is that they often do not require credit checks, making them accessible to individuals with less-than-perfect credit histories. What’s more, you have the option to purchase the property at the end of the term, not the obligation to purchase it.

Since rental payments can often be credited towards the final sale price of the property, it makes home ownership far more of a reality for a lot of people.

Finally, Rent-to-own offers a short-term way to evaluate the property before investing in it.

Cons of Rent-to-Own

Though they offer excellent flexibility, Rent-to-own arrangements have drawbacks, too. Most notably, you will pay a higher ‘rental amount’ during the option period; if you don’t exercise the option to purchase, you will likely forfeit that additional amount.

Rent-to-own agreements are also neither loans nor credit arrangements; that means you won’t build equity in the property unless you complete the purchase.

What Can Go Wrong With a Rent to Own Agreement?

While a rent to own agreement may seem like the perfect solution for those who cannot currently qualify for a mortgage, or those who don’t have the funds for a large enough down payment, there are a lot of potential hazards.

One of the most easily avoidable, yet one of the most common, is incorrect contracts, or contracts that are signed without full knowledge of what they mean.

If a potential buyer has to break the rent to own agreement for any reason they may lose their initial deposit. Further, some rent to own contracts may be written so that the renter also loses all of the money that was set aside for a down payment. In the example above, this would mean the renter loses not only the $10,000 original deposit, but also the $14,400 in extra rent they have been contributing to a down payment.

A contract that is written up incorrectly can also be a serious problem. This is because if rent to own contract is written incorrectly, the Canada Mortgage and Housing Corporation and the mortgage lender will not accept the rental savings as a down payment.

Sometimes a home seller will attempt to benefit by having the buyer agree to an inflated price in the contract. Not only is paying more than a home is worth an issue, but even larger problems arise when an appraisal is needed for a mortgage.

For example, if a buyer signed a contract that they would pay $400,000 for a home, and then, a few years later when the time came to purchase the home, the CMHC required appraisal found the home to only be worth $300,000, the buyer would have a serious problem. A bank will not provide a mortgage for a higher amount than the property is worth, which means there is nothing for the buyer to do but come up with the extra $100,000 on their own.

There are a lot of benefits to rent to own agreements, but there are also a lot of ways they can go wrong. The best way to ensure a rent to own contract is correct and suitable is to hire a lawyer who has experience with rent to own contracts and home buying, like Juriscorp Law Offices. Contact us for advice on your rent to own agreement today.

The article originally appeared here.

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