Rent To Own Works If You Follow These Steps
(~ 12 minute read)
I was reading an article on CBC that said “rent to own is a scam” and it really bothered me. Rent to own itself is not a scam, however much like Kathy covered in that article, I can’t deny that there are people out there who do not have your best interest at stake! There are people that set up a unreasonable rent to own roadmaps to scam Canadians, and sadly those people give people like myself and the members of CAROP (Canadian Association of Rent to Own Professionals) a bad name. So rather then complain about the misconception of a GOOD rent to own deal, I want to give you these tips to follow to make sure your rent to own is a win.
One of the main reasons rent to own does not work, is that the people doing it, buyer and seller, are not educated. All too often, a desperate home seller will let anyone into their home, thinking that their rents will come in, on time, and that the renter will end up buying their home.
Often good intentions from the beginning turn to disaster. A proper screening process is vital for the rent to own house buyer to succeed in buying the home as it reveals the ‘roadmap to homeownership’. If a home seller is offering rent to own as an option, there are 5 things that they must make sure the buyer is able to do BEFORE signing agreements, and handing over the keys.
Rent to own buyers beware of a seller, or rent to own company that does not do any of these 5 things:
- Being pre-screened
- Proper agreements
- Budgeting and a forced savings
- Regular check ups
- Facilitate the final purchase/sale
As a future homebuyer, you need to get mortgage approval before you can buy a home. The same is true for a rent to own home. Mortgage pre-approval and rent to own pre-approval are done in the same way. The main difference is that approval for a mortgage has been getting a lot tougher lately, and rent to own pre approval looks at what your future financial situation could be, and if you can buy in the next few years.
If a buyer is not pre-approved, there is absolutely no way to forecast whether or not they will be successful at purchasing the property at the end of the rental term. Rent to own success is predictable, when the proper screening is done.
A few of the things necessary to predict success include:
- job/income verification
- are taxes paid
- credit history
The screening process is the single most important part of a rent to own. Knowing that a rent to own buyer can succeed, and in how much time is totally predictable. If you are offered to buy a home as a rent to own, and are not being asked for all of the above information, there is no way to know if you will be able to successfully buy the home. Doesn’t it make sense to know that you will be successful, before entering into an agreement?
If you are a home seller feel free to take a look at our Rent To Own Application for an example of the questions we ask those interested in purchasing using Rent To Own.
A rent to own that is set up for success must have at least 2 separate agreements. Just as the words “rent to own” are put together so are the agreements. One for renting and one for the purchase of the home.
- the rental lease
- the option to purchase
The rental lease is the same as any lease. Each province has different rules for what should be in a lease, but to keep things simple, ALL rent to own lease agreements must have a start date, and an end date. Say, for example after getting pre-screened you find out it will take 3 years before your credit will allow you to buy, you want to make sure that you lease mirrors your ‘roadmap to homeownership.’ Rental prices should be compatible to similar homes in the area and fair. Nobody is overpaying on their rent.
If the company or person you are working with suggests taking things one year at a time, it is a BIG RED FLAG. They either don’t know what they are doing, or do not want you to succeed.
A lease for less than 3 years means you could be told to leave the property before you buy it. And that’s just not fair.
The Option to Purchase is the agreement that most people have a hard time understanding. So, we are going to keep things simple.
This agreement gives you, the person planning on buying the rent to own, and only you, the ability to buy a specific property. Just as the rental lease has a start and end date, so does the option to purchase agreement. Other details should be made specific in this agreement, such as the purchase price.
For example, say you get prescreened and find out it will take 2 years of credit work, and maybe paying off a credit card. A good rent to own company will create a ‘roadmap to homeownership’ and work to help you succeed, and work within your budget. It is ok to make the rent to own longer than the 2 years, if it is to give more time for the forced savings to build. Instead of taking the amount you need for a down payment and dividing it by 24 months, often going for 30 or 36 months can make all the difference making the rent to own program affordable.
The Option to Purchase can only be created once your ‘Roadmap to Homeownership’ has been planned. Knowing the obstacles that need to be overcome, and then planning on how to tackle them one at a time can only be created from a good application form, and being honest about anything credit and income related.
This is the agreement that most of our clients get independent legal advice about. There will be parts in the agreement that protect the seller, and parts that protect the buyer. Purchasing a house is normally the most expensive thing a person buys in their life. Given the large amount of money involved, making sure you understand what you are signing is important.
WARNING: If the purchase price is not agreed upon from the start, you could be getting scammed. Without a set purchase price, it is impossible to know how much need for a down payment. Every month you should be putting enough into your ‘forced savings account’ so your total saved is enough for you to buy at the end of the rental lease.
The forced savings account or rental credits are another critical part of making sure you will have the ability to buy the home before the expiry date on the option to purchase. With a price set, you can now determine how much you will need to be saving up, on top of rent, each month.
The ‘forced savings’ become your deposit for when you buy. If you are late in your payment, or unable to make one, you risk forfeiting some of what has been saved. Part of showing a top bank lender who can get you a good mortgage rate and mortgage approval, is showing that you make your payments on time, and in full. Banks like seeing consistent savings history for your future house.
Without being forced to save each month, you risk falling behind and not having enough of a down payment when the time comes for you to buy. Working with a professional will help determine the amount you will need to save each month in order to be able to buy. These ‘forced savings’ are often called ‘rental credits’ or your ‘option to purchase deposit’. Their amount and frequency of payment is found on the Option to Purchase agreement.
Regular Check Ups
Working with a professional credit coach who is also a mortgage broker is mandatory for everyone. Credit repair, and monitoring are absolutely critical to being successful in your purchase at the end of the rental term.
Meeting every 90 days to ensure you are ready for each step and giving you the resources along the way is one of the main reasons our rent to own buyers have such a high success ratio.
During these brief meetings, we also go over budgeting, and plan which debts to pay down, in what order, and help look at ways you can accomplish this. Budgeting may not always sound like fun, but knowing if you can afford a winter holiday and be successful, or whether financing that new vehicle is a good idea before buying your home are all part of the meetings. Being able to get the things you want, and home you deserve are what everyone wants.
By following all the steps in your ‘roadmap to homeownership’ you will have a predictable path to follow. We will help you navigate any obstacles, including the constantly changing mortgage rules. We can predict a successful purchase 9 months before the actual purchase. At the 3 month to homeownership mark, we will prepare all the sale agreements, and set a closing date. By this time your credit will be fantastic, allowing you to get a great rate for your mortgage. We will handle the transaction with a lawyer, and your ‘forced savings’ will be used as the down payment.
Just like that, you can be achieve homeownership, and live the Canadian dream!
If you want to learn if you are eligible for Rent To Own, please fill out our application by clicking here!