Renters, this article is for you! With the market still holding strong, with high prices and low inventory, the thought of getting out of your rental may seem daunting. However, if you have an accommodating landlord and the will to save, Rent to Own (RTO) may just be the right solution for you. We are going to look at the what, who, why and how of Rent to Own (RTO) and get you started towards saving for your dream home!
What is Rent to Own?
Rent to Own (RTO) is a contract signed between a renter (the buyer) and the Landlord (the seller) that states an agreed price, length of time of renting to own, and market rent (typical rent of a similar property) with any excess going towards the down payment.
For example, the market rent for your property goes for around $1,000.00. You agree with the landlord to pay $1,400.00/month—that extra $400 will go into an account that the landlord has set up for you for the down payment.
The down payment will continue to grow during the life of the RTO contract. At any one time the tenant can add lump payments to the down payment, simply by giving the Landlord a bigger rent cheque. Keep in mind that the down payment is non-refundable—which is why you will want to involve a mortgage professional and a lawyer in this process!
Who is all involved in RTO?
In a RTO agreement, there will be various people involved. There is of course the tenant (buyer) and the Landlord (seller), however, there is also a mortgage professional & a lawyer/solicitor.
A mortgage professional will work with the tenant to have them pre-approved and also act on the tenant’s behalf when the lender becomes involved. The Mortgage Professional is also highly knowledgeable on the lender policies and guidelines for RTO contracts and can advise on the proper set-up for the RTO.
A lawyer/solicitor’s role in all of this is to work alongside the mortgage professional. It ensures everything goes according to plan and the RTO contract and policies are upheld. They will also be responsible for setting up and writing the contract—the most important element of an RTO!
How to set-up a RTO?
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. The elements that need to be included in the contract are:
- RTO must be properly registered on the title
- Include the purchase price
- Include the term and length of the RTO agreement
- Purchase Price negotiations should be formulated based on the market trends of the area in which you are buying.
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.
Why use an RTO?
Rent to Own is one option to buy if it fits your personal circumstances. While the contract is in place, it can help the buyer to:
- Work together with the mortgage professional to develop a mortgage strategy
- Improve your credit rating
- Consider refinancing any outstanding credit
- Consider job changes or other sources of income to increase your down payment
There you have it. The what, who, how and why of Rent to Own. This unique solution could be the answer for someone who is renting currently but is having a hard time getting their down payment together. In the Lower Mainland, 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 take a look into RTO!