Rent to Own In Calgary | A Quick Guide
As a Realtor® I am often asked about the rent to own and I have been on both sides of this type of transaction. I am not a lawyer nor a mortgage lender but I wanted to share what I have learned about this somewhat mythic scenario.
I feel like there is an unnecessary negative stigma when it comes to a rent to own agreement for real estate. It is my belief that this stems from situations that have arisen where one party, typically the buyer/tenant, ends up in a situation that they feel exploited, unprepared or otherwise compromised. This could be almost entirely avoided if both sides were properly educated and prepared.
Rent to own compared to regular purchase agreeement
Let’s start by comparing this to a typical purchase contract for real estate here in Alberta.
- Time to close = Risk
- Rather than 30 – 90 days we are talking about entering into an agreement that may span 1000 days. If you do the quick math that is 3000% longer. Put simply there is theoretically 3000 x the potential for floods, fires , market changes, job changes, marriage changes, major capital repairs etc.
- Control
- In the typical purchase and sale the seller is in possession of the property until they no longer own it. Therefore, the seller is responsible for and has first-hand feedback from, how the property is used and maintained until the tile changes hands. The rent to own has the seller maintain ownership of the property while the buyer is in the home which clearly raises the need for discussion and documentation around the responsibilities of the partys.
Why do people rent to own?
They reasons are are as varied as the people / properties / locations and circumstances involved but here are a few common ones:
Buyers
- New to country and needs to establish credit before perusing traditional mortgage financing
- High income but a loss of equity in a property that had to be sold to make a move. In the darker days of the last oil crash and disasters in Ft. McMurray many people needed to move, were capable of earning high incomes but some had lost hundreds of thousands of dollars in equity.
- Begin renting a house, and over the years renters decide they like it enough to buy it
Sellers
- Potential get the best of both worlds. An income property now with a sale pending
- Strong bargaining position
- Higher overall return on their property
Components in the rent to own:
Purchase price
This one is fairly straightforward on the surface. You will need to determine a market value now for the future time of closing at end of term. So here you want to keep in mind where the market is going, not where it is. A lot can happen in a market in 2 years – just look at Calgary and Okotoks. If you were a seller making a rent to own deal 2 years ago, could you have factored in the increase in value? This is something you want to do with a Realtor® you trust. Having the most up to date information is critical.
Deposit amount
As the seller of a rent to own, the deposit amount needs to cover potential non-completion and the asset time commitment on your part. It also needs keep the buyer motivated to close. The higher the amount you can receive the lower your risk will be.
Term
The term refers to how long until the option to purchase expires and buyer / renter must buy or the seller will take deposit and option fees. This could be 1-3 years, the expectation is that the renter will be able to get traditional financing at the end of this period.
Rent amount
The rent amount is whatever the usual market rent would be for the property in a normal long term rental arrangement. This does not go towards a down payment in the eyes of a mortgage lender. There needs to be an additional fee for the option to purchase ( option fee below).
Option Fee
The option fee is the additional amount that a renter / buyer would pay to the landlord / seller each month on top of the market rent. This is the amount that would go towards creating a down payment.
This is typically be calculated on the basis of :
Required down payment to finance through mortgage – the upfront down payment you would receive – (remainder of down payment required / term )
So here is your possible scenario:
1. A buyer needs $40,000 down to get CMHC insured mortgage financing in 2 years
2. Lets say the term you decide is 2 years ( 24 months)
3. They have $25,000 now to give you so that leaves $15,000 additional required to get financing in 2 years
4. So $15,000 / 24months = $625
So this would be a $625/mnth additional payment on top of the market rent
You need to establish what portion of rent or what additional payment forms a part of the down payment.
Responsibility
Who is responsible for the property while the renter is there until they purchase. Would the renter be? Would you as the seller continue to manage to ensure the property is taken care of? Who is responsible if an appliance needs replacement, what quality of appliance would that be and does this affect the purchase price?
Advisors
In an agreement that can span years, has a high value and involves ever changing markets it is a best practice to seek the advice and assistance of professionals
- Lawyer – to think how all of the potential situations could impact you and how you can protect yourself you will need the help of a legal professional.
- Realtor® – knowing local markets and market direction will ensure you get the highest possible value
- Accountant – clearly there are tax implications here so you need to consult a professional