A ‘rent-to-own’ is a special type of tenancy contract where your goal is to eventually buy the property from the landlord. At the start of the agreement you arrange a price for the purchase and a set period (3 year, 5 year, etc) during which you will pay a monthly amount to the landlord that covers both your rent and a contribution towards your down payment. Your landlord is responsible for accumulating the down payment funds over the course of the contract period, and at the end of contract period you have the right to buy the property from the owner at a price agreed upon when the contract started – typically by arranging mortgage to cover the balance of the purchase price.
The challenge with rent-to-own situations is that for them to be legal and valid at the time you are buying the property out (where you will need a mortgage from a traditional lender) the contract and down-payment money must be handled in a very specific way to satisfy the lender that the ‘down payment’ source is valid towards the purchase.
For a Rent-to-Own Agreement to be considered valid, it must be signed and dated at the start of the contract term and include and/or be supported by:
- A letter of economic rent from a certified appraiser that was done at the time of the agreement. This confirms a reasonable market rental rate for the property, and confirms that the amounts paid above this rate can be considered contributions towards the down payment (i.e. rent payments in excess of market rent are eligible as a source of down payment).
- The Agreement must be registered to the property title at the start of the agreement (registration cannot be done ‘after the fact’).
- The sale price must be clearly stated for the prospective purchaser to complete the purchase at the end of the contract period (this also sets the value of the property for mortgage purposes)
- The agreement must be fair and reasonable, and include provisions for extenuating circumstances (what happens in the event of a late payment, if the property is minorly or substantially damaged, if either party were to be injured or die, etc) and the prospective purchaser(s) should be entitled to receive some refund of the amounts set aside as down payment in the event the sale does not proceed.
So the key ideas are that the contract must be written up and signed at the start, it must meet all of the above conditions, it must be registered to the property title at the time the agreement begins (which requires a lawyer or notary), and it must be fair and reasonable and allow for a reasonable portion of the down payment to be refunded should you decide not to proceed with the purchase.
We recommend using a lawyer to draw up the contract to ensure, and that both parties receive independent legal advice to ensure the arrangement is fair and reasonable to all concerned. The solicitor will also help with registration of the agreement to title.
Between the letter of economic rents from and appraiser and the legal costs, you should budget $1,500 – $2,000 to begin a rent-to-own contract that will satisfy a mortgage lender for financing at the time of purchase. Before spending time and money, we stronngly recommend speaking to a mortgage consultant to ensure you understand the risks involved and that you have a good plan in place for eventual mortgage qualification.
Other resources: The BC Financial Services Authority has an article on Rent-to-Own contracts.