Is Rent to Own Housing Ever a Good Idea?

Is Rent to Own Housing a good idea?

If you’ve been in the U.S. over the last couple of years, you’ve seen the signs – generally at large intersections: “Rent To Own! No Financing Necessary! Call Now!”

Rent-to-own housing is touted as a good deal for homeowners who have trouble selling and buyers who can’t get conventional financing, either due to poor credit or because they don’t quite have enough money for a down payment. By the end of the agreed-upon rental term, in theory at least, the tenant will have saved enough for their down payment, and should have an improved credit score and may even be eligible for an insured CMHC mortgage.

Understanding Rent-to-Own Deals

In most rent-to-own cases, 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. However, they must pay rent in the meantime, plus an additional fee that will go toward a down payment on the eventual purchase.

The eventual purchase price is generally locked in – arguably so tenants don’t face any surprises on the final price they’ll pay at the end of the term – although some contracts use the property’s eventual appraised value to set the final price.

Along with being responsible for any maintenance costs, tenants are also typically required to put down a 2% – 2.5% deposit (generally $5,000 to $10,000) towards the final sale price.

So, what would these costs look like? Let’s say a buyer agrees to purchase a home for the final price of $350,000, while paying $1,000 monthly rent for a term of three years and a $500 monthly toward their down payment:

Total Home Purchase Price: $350,000

2.5% Deposit (to be subtracted from the final home purchase price): $8,750

Amount owed on home at the end of the rental term: $341,250

Monthly Rent: $1,000

Monthly Contribution to Down Payment: $500

Total Mortgage Remaining ($341,250 – $18,000) = $323,150

By the end of the three-year term, the buyer has successfully saved $18,000 toward their down payment for their $341,250 mortgage. However, they’ve also paid $36,000 in rent over that time period… and now the real fun begins as they qualify for a real mortgage and start from scratch with those payments. In total, they’ve already paid $62,750 for their home – and that’s not including the mortgage interest they must now pay for the remaining $323,150, based on the rate they qualify for.

Why Pay Rent and Cash Up Front?

The deposit money will be held by the homeowner as a credit towards the price of the home at the end of the lease option on the theory that tenants with ‘skin in the game’ are more likely to look after things.

One caveat: If you’re late with future rent payments, neglect the property, or decide to move or break the agreement altogether, that deposit and any option credits are at risk – along with any phantom equity that you may have built up.

When Things Don’t Work Out

While rent-to-own offerings are nowhere near as common on this side of the border, several small Canadian companies have been enticing prospective home buyers into the market, as well as targeting cash-strapped homeowners looking to get out from under.

And for many people, things haven’t been working out that well. When one B.C. couple tried the rent-to-own route last year, the deal fell apart early. The so-called prospective buyer ended up squatting in their property for months.

Deals Often One Sided

Another Ottawa couple signed an agreement with Golden Oaks Rent 2 Own Canada on the understanding that a $10,000 down payment and then $1,800 per month in rent would ultimately lead to them purchasing the home in about five years.

Unfortunately, that’s not what happened. Instead, they found themselves on the street after the now insolvent company found itself facing multiple lawsuits from jilted tenants and homeowners.

The whole affair is a mess, so much so that it’s starting to look like a Ponzi scheme in which those listing their houses were being paid out of newer investors’ contributions. Overall, the company collected more than $20 million in investors’ money that has since disappeared.

Have a Pro On Your Side

Despite this, there are still rent-to-own deals on offer across the country – particularly in tight markets like Calgary and Vancouver.

If you’re anxious to enter the market and are thinking of going this route, get a lawyer to review any contract; deal only with licensed real estate professionals; and ensure that any earnest money is held separately in trust, not in the company’s.

Related Topics

Buying A Home / First Time Home Buyers / Mortgages

One thought on “Is Rent to Own Housing Ever a Good Idea?

  1. As a real estate agent who specializes in Rent to Own, I agree rent to own programs might not be suitable for everyone. Generally, two main types of home buyers who benefit the most from a rent to own program are 1. Self employed individuals 2, Credit challenged home buyers. A good rent to own program will help these home buyers repair their credit scores and save up enough down payment while they get to live in their “rent to own” home and lock in a fair future purchase price.

    Some might argue that using a private lender might be a better than a rent to own program. However, private lender charges a much higher rate in interest. As well, if these home buyers do not qualify for a first mortgage at the time of buying a home, then what is the private lender doing to help the home buyer to qualify for a first mortgage down the road. I have met many clients who are stuck paying a high interest rate from private lenders with no way of getting out.

    My advice to potential rent to own home buyers is research, research and research. Find a reputable rent to own company. Ask lots of questions. Some of the questions you might want to ask are:
    1. How long have the rent to own company in business?
    2. How many rent to own deals have been completed and what is the success rate?
    3. What is the monthly payment plan?
    4. What does the rent to own company do to help you prepare to qualify for your own mortgage at the end of the rent to own term?
    5. What factors are used to determine the future purchase price?

    Unfortunately, there are bad apples in every industry. It is not fair to judge the overall effectiveness and benefits of a rent to own program because of these isolated incidents. Again, please do your research and find what is the best solution for you and your family.

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