Toronto has a booming real estate market and things are heating up again even after rules were put in place last spring that tightened lending criteria. Real estate remains a solid investment and people are keen to get into the market – but affordability seems to be decreasing, especially for first-time buyers. I often get asked if there are any alternatives to huge down payments and approval from conventional lenders for someone to own their own home. Yes!! Enter the rent-to-own option.
Rent-to-own is a common practice people are familiar with for home furnishings, electronics and even cars… but many aren’t aware it can be a consideration for home ownership as well. This scenario can be appealing to: investors, people that have been turned down for traditional mortgages (based on self-employment or less than perfect credit) and recently divorced individuals.
There have been stories about unscrupulous owners who have taken advantage of unsuspecting buyers. Beware and do your research. I’m not talking about simply working out an agreement between you and a home owner to purchase their home. This option can work as well, but be sure to check with a lawyer. There are reputable companies that deal exclusively with rent-to-own agreements and these are the ones that I’m discussing and suggest you look into.
A down payment can be the most daunting part of purchasing real estate and the main reason keeping buyers out of the market. This payment can be a more realistic amount for many in a rent-to-own scenario. While every case is unique, a minimum of $10,000 or more is recommended. This is called the “Initial Option Fee”.
In a rent to own program, there are two agreements between you, the buyer /tenant, and the landlord. These two agreements are known as the rent to own “option to purchase” and the rent to own “lease agreement”. To ensure you are protected, both contracts should be reviewed by a lawyer prior to signing.
Your monthly rent includes property taxes, building insurance and condo fees (if applicable), as well as an amount put aside for your down payment on the home. Commonly, rent-to-own terms are between three and five years. At the end of the lease team, you have the option of purchasing the home you rented.
A concern for most people is how the payments compare against regular mortgage payments. When taking into account all aspects of the program, many payment schedules are lower than a traditional 5% interest rate.
There are no guarantees that rent-to-own will work for you but it is a great option to look into. The key is to be honest about your situation and weigh the pros and cons closely. If you are in a position to pay higher-end market rent prices, but you don’t have a 5% down payment to purchase a home, the rent-to-own option may work for you.
Questions or comments? Please reach out if you have questions. I love to talk about real estate. Whether buying or selling, I can help you determine what your next steps should be to reach your goals.