Renting to own a house can be a very effective way for a buyer without enough of a down payment to buy a home. But do your homework.
The concept of rent-to-own can be a very effective way for a home buyer who does not have enough of a down payment, or the right credit score, to buy a home. It allows you to make the purchase over time at a set price.
But you have to be careful. Without due diligence, problems can occur for everyone involved.
In a typical rent-to-own arrangement, the owner and tenant sign an Option to Purchase agreement, where, for a fee, the tenant acquires the right to buy the home two or three years later, at a set price. The fee is usually 2 to 2.5 per cent of the purchase price. The tenant pays the rent each month, plus another amount towards the down payment.
Ideally, this comes up to 5 per cent of the purchase price by the end of the contract. Hopefully, by then the tenant has improved his credit score and qualifies for an insured CMHC mortgage, and the deal closes. A benefit for the landlord is that most tenants who have this option will take better care of the home, since they expect to become the owners.
Related: The pros and cons of rent to own
Problems can arise when a middle man offers to get between the home owner and the rent-to-own tenant. The middle man offers to manage the arrangement for the owner for a fee and may also guarantee the owner a sale if the tenant doesn’t buy it.
If the middle man is a scam artist, he disappears with the fee leaving the home owner and tenant wondering who owes what to whom and their rights.
An Ottawa company is facing lawsuits from tenants, owners, lenders, investors and contractors involving a rent to own business.
Golden Oaks Enterprises, and its owner, Jean-Claude Lacasse, acquired 48 properties in the Ottawa region using the rent to own method. As reported by CBC, in one case, Golden Oaks agreed to buy a home but couldn’t find a tenant and backed out of the deal. The seller had already purchased another home and then had to carry two homes.
In another case, a tenant who made the down payment was evicted when an investor with a second mortgage took over the property. Meanwhile, investors put money into Golden Oaks after being promised a 30 per cent return by investing in rent to own properties.
The allegations have not yet been proven in court, but a receiver has been appointed to administer Golden Oaks affairs and it appears most of the investors will lose everything. Lacasse‘s own home is up for sale as well.
Many tenants who cannot qualify for a mortgage might be excellent candidates for a rent to own contract. But they should remember these arrangements require the same due diligence and protections as any real estate contract, to avoid problems later.
Here are some suggestions:
•Any deposit sum paid towards the final purchase price by the tenant should be held in trust, similar to a normal real estate deal. It should not be paid to the landlord or a third party, until the deal closes or terminates.
•Do your homework. For a small fee, go to the county registry office and get a copy of the owner’s title records, showing who actually owns the property and the amount of any mortgages registered against title. Now you know you are dealing with the correct owner. You should also ask for a mortgage statement showing how much is owing on the property.
•Register the lease and option agreement against title. This will protect the tenant from future dealings by the owner with the property. In most cases, the tenant will have to pay land transfer tax in order to do this, but it should not be more than $100, so long as the option agreement is kept separate from the lease, since land transfer tax is only payable on the price paid for the option, not the final purchase price.
Or just use a lawyer to protect everyone involved by doing the proper due diligence in advance.
Be suspicious of a middle man who wants to buy an option on your home. Rent-to-own can work for landlords and tenants, if everyone is properly prepared before signing anything.
Mark Weisleder is a Toronto real estate lawyer. Contact him firstname.lastname@example.org