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Rent To Own contracts are more than just paying rent to the Landlord and applying the rent toward the purchase of the property. We are going to walk you through the steps that are involved in a Rent To Own (RTO) contract. Starting off with what is it, how it works, and the pros & cons associated with it. Are you ready? Time to start reading!
What is Rent to Own (RTO)?
What is Rent to Own? It starts with a contract. A contract is signed between the renter (buyer) and the Landlord (seller). The contract will state:
- agreed price
- length time of renting to own
- market rent amount.
The surplus of rent that is being paid above market rent will be going towards the down payment of a house. For example, market rent for the property you are renting to own is $1000.00; you and the seller have agreed that you are going to pay $1400.00 each month. This means $1000.00 will go towards the rent and the additional $400.00 will go towards the down payment.
The Contract & How it Works
The contract is the most important aspect of an RTO. Things to keep in mind include:
- The RTO must be registered on title using the services of a lawyer/solicitor
- The contract will include the purchase price along with the term of the RTO agreement. Negotiations of the purchase price will be based on market trends of the area in which you are buying.
- The seller (landlord) cannot change or get out of the RTO during the term of the contract
- If the RTO is in place you can “sell” the contract to another buyer who will assume the contract to recoup your down payment. The price is usually the down payment amount you have already payed to the landlord.
- A clear account history of the surplus of rent paid that is acting as the down payment of the RTO. Lenders will want to see banking statements showing the accumulation of “excess” rent that was paid over the agreed market rent outlined in the RTO contract. Important for the seller not to spend this down payment during the course of the contract.
Pros of RTO
RTO’s have great benefits to them, especially in a red hot housing market like the one Metro Vancouver is experiencing. These include a number of things:
The biggest benefit of RTO is that it allows you to work towards a down payment. If you are currently renting and struggling to put money aside each month, this solution can work well.
- Improve your credit rating
Over the course of the RTO contract you should also consider improving upon your credit rating as this will help you to get a sharper rate. Our free E Booklet, Credit Medic, can give you the first steps on How to Improve your Credit Score
- Increase employment income
You will have time to consider a job change with an RTO. If you can increase your overall income, you can increase the amount you can put towards your mortgage payment each month. This will place you closer to your goal of home ownership and ease the financial strain of taking on a mortgage.
The Cons of RTO
As with anything, RTO is not without its downsides. Although they are few, you will need to consider the following before entering into an RTO contract.
Banks will typically look favorably on an RTO however if you do not work closely with your lawyer/solicitor/mortgage broker throughout there is a higher risk for errors in the structure of the contract.
- Non-refundable down payment
Your RTO amounts will be non-refundable. At any time, you can add lump payments to the down payment, simply by giving the Landlord a bigger rent check. However, this amount will not be refunded to you should you choose to exit the contract early.
Who RTO is Right For
Together with the mortgage professional you are working with, during an RTO contract you will work to develop a mortgage strategy so that when the time comes to make an offer to purchase, you are ready to approach a lender for mortgage financing. RTO’s are typically between 1-5 years long and present a unique solution to begin saving for a down-payment.