Rent to Own — How Does It Work?

Q: What do you mean by Rent-to-Own?

A contract is signed between you and the seller for an agreed price and length of time (usually 1 to 3 years). You pay a down payment of usually 3 to 5% (sometimes zero down). The more you put down, the lower your monthly payment. You don't qualify for a mortgage from the bank until the end of the contract, because the seller leaves their mortgage on the home. Part of your rent goes toward that mortgage, and you pay a monthly amount toward a down payment fund that builds over the life of the contract. At the end of the term you find your own bank financing and pay the seller out. The seller cannot change or get out of this contract during the term. For all intents and purposes, this becomes your home.

Q: How do you calculate my monthly payment?

The monthly payment is basically what you would pay if you bought it the traditional way with a mortgage. Your payment also includes a portion for taxes, insurance, and strata fee (if any). In most cases we set up an initial rental term of 24 months, and you get a credit of a portion of your monthly payment each month toward the purchase price. If you cannot purchase with the bank at the end of 24 months we can extend as long as the market has not significantly increased.

Q: Why are these homes offered as Rent-to-Own rather than just sold? Is something wrong with them?

The market follows a cyclical pattern. Often houses sit on the market for many months with very few buyers making offers. Many homeowners would rather sell over time than lose thousands while the house stays vacant, or sell far below value. We buy homes from sellers in this position — including homes about to go into foreclosure or in distress — and offer them at a fair price to buyers who can't qualify for a mortgage today but will be able to later.

Q: Am I paying more than I would the old-fashioned way?

Since we work directly with the sellers, there are no real estate commissions, legal fees, or carrying costs. We obtain these houses at a very good price, make a modest profit, and you pay virtually the same price as you would with a traditional purchase.

Q: When is the purchase price set?

At the time of negotiations, before you move in. The purchase price is set today for future delivery, similar to an equity option or leasing a car. The term of the agreement is also determined at this time.

Q: Why buy instead of waiting until I can qualify for a mortgage?

Many of our clients have been renting for years and can never find a way off the renting treadmill. With our creative financing, you accumulate down payment credits. We also help you look at how to improve your credit rating, whether you need an RRSP loan, whether outstanding credit should be refinanced, and how to increase your down payment.

Q: How long will my Rent-to-Own agreement last?

Agreements are based on the financing, but anywhere from 1 to 5 years. We structure them so you can complete the purchase at any time during the term by simply advising us — we'll do the rest.

Q: What if we can't qualify for a mortgage at the end of the term?

Our goal is to sell the home — we don't want it back. We'll do our best to extend the agreement or work out an alternative. However, if you feel you may not be able to qualify in the years allotted, Rent-to-Own may not be the solution for you.

Q: No one I know has ever heard of this — is this legal?

Rent-to-Own is an agreement used all across Canada. We are part of a large network that specializes in creative real estate solutions, with associates doing Rent-to-Own agreements for well over 10 years.

Q: How are monthly payments calculated?

These properties have existing mortgages. The monthly payment is based on the mortgage cost (principal, interest, and insurance) plus property tax and strata fees. We compare the mortgage cost structure to the market economic rent. Sometimes the payment can be lower than comparable market rent. Any payments over the carrying costs go directly to your down payment fund, and you can make additional payments to increase your down payment over time.

Q: How does making larger monthly payments help me?

The more equity you have, the better your chance of obtaining a conventional mortgage at preferred rates. The more you pay above the carrying costs, the greater the down payment credits you accumulate toward the purchase.

Q: What if I want to pay down a lump sum?

There are no penalties or additional fees for a balloon or lump sum payment at any time during the agreement — it goes directly to your equity.

Q: Can I take ownership before the end of the term?

Yes. If you are ready to qualify for a mortgage during the term, you can exercise the option to purchase and take title. Some clients have even paid in full in cash due to an unexpected inheritance, bonus, or other good fortune.