With the real estate market continuing to hold steady, many young families are looking for other options to afford a home. Many millennial families still are holding onto the dream of owning a detached home or their own townhouse/condo one day…but the task of moving on from a rental can seem daunting and impossible. This is where a Rent To Own (RTO) property can offer a solution. Here are 5 reasons you may decide to look for an RTO property
- RTO allows you to have a set savings plan to put towards one day owning the property you are currently living in. How this works is by setting up a contract with your Landlord (seller) and agreeing to pay an amount each month that is above what your rent is currently for a set amount of time. For example, if the property you are currently renting rents for $1000 you would agree to pay the landlord $1400. The additional $400 would go into an account the landlord has set up for you and towards your future down-payment.
- RTO will allow you to make lump-sum payments during the course of the RTO contract. It’s common with most RTO contracts to have the option to pay a lump sum payment to the down payment by giving the landlord a larger rent cheque. Keep in mind that the down payment is non-refundable which is why it is crucial to involve a mortgage professional + lawyer in the process.
- RTO’s will require you to be pre-approved prior to the contract going through. This is an ideal situation as being pre-approved allows you to fully understand the other factors that contribute to you getting a mortgage. For example:
- Your current income level
- Your current credit score
- Your current debt owing
- How much you are pre-qualified for
Knowing these numbers can highlight other areas that you may need to work on or improve during the time you are saving up for the down payment and set you on the right course for when you are ready to purchase.
- You can pre-establish a great team of professionals working with you. As with any mortgage product, a RTO will require you to work with a team of professionals including a mortgage broker. Building this relationship early can help you alleviate any further speed bumps you might have down the road. They can work with you for the entire process and make it run smoother + help you stay on track.
- The setup is simple and offers a unique solution. Setting up a Rent to Own starts with a contract. The lawyer or solicitor will write this for you and should work closely with your mortgage professional to accommodate lender policies and guidelines. Here are some of the important elements that need to be included in the RTO contract are:
- The Purchase Price
- Purchase Price negotiations formulated based on the market trends of the area in which you are buying.
- The term and length of the RTO agreement
- Exit and/or assignment clauses
The RTO must be registered on the title of the subject property and RTO down payments collected thru the contract must have a clear and full banking history that is supported with bank statements. These down payments must not be spent by the seller at any time.
Once you agree on the RTO you can agree on the future purchase price and timelines as well. This will give a target and allows one to know that once they’ve hit x amount of years over RTO payments, they will have enough of a down payment to purchase the property at the originally agreed-upon purchase price.
Now, what happens if things change and a party wants out of the contract? For the Landlord, they are required to honour it until the term is over. For the tenants, they are able to “sell” their contract to another buyer who will assume the contract to recoup your down payment. The price is usually the down payment amount that you’ve already paid to the Landlord.
The contract can also include the fact that the tenant (buyer) can purchase in certain intervals at a certain price but does not have the right to recoup your down payment.
One final thought on Rent To Own properties; There are many RTO companies and solicitors out there. Choose wisely who you opt to work with. Many do not fully understand the setup of an RTO contract and the contracts that need to be followed by Lender guidelines. It is always best to have the solicitor work hand in hand with your Mortgage Broker to ensure that the contract lines up and nothing is missed during the set-up process.
This unique solution could be the answer for someone who is renting currently but is having a hard time getting their down payment together. RTO’s are becoming more and more popular due to the high housing prices. For more information regarding RTO give us a call at 604.259.1486—we would be pleased to help you look into RTO!