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Realty 57

Although not widely publicized, rent-to-own can be a good option for people who find themselves in a situation which prevents then from purchasing a property in the usual manner. It may be that you have sold a property but don’t have enough money for a downpayment on another, or your credit history is poor and the bank won’t qualify you for a mortgage. It may be that you are a newcomer who doesn’t yet have a Canadian credit history preventing you from applying for a mortgage. If you are a seller having trouble selling your

property it may be a way to rent the property to someone to receive an income, secure in the knowledge that in an agreed number of years the renter will buy the property from you at the pre- agreed price.

Some home builders also offer rent-to-own options on new build properties.

What is rent-to-buy

Put simply it means you rent a property with the option to buy after a set period of time. A percentage of the rent you pay to the landlord is used as a down payment towards the agreed purchase price. Obviously there are many things to consider when entering into this type of arrangement for both the landlord and the renter and as with any major purchase, careful consideration and legal advice is recommended.

Process: The seller decides on the price they wish to sell the property for and the monthly rental amount charged until that time. As with all real estate transactions this is negotiable between both parties. The rent paid is divided into two portions, one

agreed amount is income to the seller and the other portion forms part of the down payment. There is also normally a option fee payable at onset which will then be credited to the down payment. It is not unusual for rent-to-own monthly payments to be slightly higher than an equivalent straight rental amount. However you must remember that you are investing in the property and not just paying money to a landlord.

An example of a rent-to-own arrangement might be: A property is valued at $220,000 and this amount is agreed by both the seller and buyer. The buyer agrees to pay a $5,000 option fee and $1,200 rent per month. Of that amount $300 per month is credited to the down payment. The agreement is for three years. Over the three year period the buyer will have paid $15,800 towards the down payment. During this time they will have built up a credit history and should be in a better position to purchase.

If at the end of the three years the buyer decides not to purchase then all monies paid are forfeited and the seller keeps the money and the house.

Advantages for buyers:

• Allows time to build up credit history and improve income before purchase

• Easy way to save for a deposit • Able to live in property during rental period • Can walk away from the agreement at any time, subject to forfeit of amounts already paid

• Price locked in at start of agreement Disadvantages for buyers:

• Upfront option fee required • Any repairs on the property are the responsibility of the buyer even during rental period

• Any late rental payment forfeits that months credit towards down payment

• Locked in sale price may be a disadvantage if houses in the area decrease in price

Advantages for sellers:

• Locked in price can be an advantage if local house prices fall

• Property will be well-maintained as renter is treating the house as their own, not a rental

• Even if the buyer backs down the seller keeps all money paid

Disadvantages for sellers:

• Locked in price might be a disadvantage if house prices rise drastically

• If buyer backs down the seller is back to square one trying to sell the property

• If the seller receives a better offer for the property they are locked into the rent-to-buy agreement

It goes without saying that if you consider entering into this type of contract you need good legal advice. As a buyer you need to know the price you are agreeing to purchase at is fair and that the money you are paying the buyer is secure. Know exactly what you are agreeing to and who is

responsible for things such as maintenance during the rental period.

Both buyer and seller need to be comfortable with

the agreement in order for it to work. But done right this can be an excellent way to get yourself onto the property ladder.

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