Renting to Own: the good, the bad, and the ugly

In the past couple weeks I've had a few different people ask me about renting-to-own, so I decided to make this post be all about renting-to-own, so if you're currently thinking about entering into a rent-to-own agreement, the following information should help you make a well-informed decision whether or not it's something you should get into.

The Good -   parts of this section are courtesy of www.irex.ca/library_rent_to_own.html

Rent To Own A Home, House On Hold
"Renting-to-own" a house is a very complicated process and normally takes place outside of organized real estate. Because there isn't any down payment, there is no commission until some hypothetical time in the future. Renting-to-own a home involves having your landlord, after securing an agreement to purchase with an agreed-to price and closing date, place part of your rent on deposit. In order to get a mortgage, your bank may need to see that the amount that is set aside for down payment is above the normal market rent for the property. (i.e. if normal rent is $800 and you're paying $1100 per month, the other $300/month is set aside for your down payment). The reason the bank may look for this is to ensure that the down payment didn't come about as a result of a kickback from the seller, unknown to the bank, with a corresponding "false" and inflated house selling price to make up the difference. This would be a case of fraud. This is one reason that banks have a home appraisal completed.
Other problems include the potential inconvenient answers to these questions, which have to be dealt with in the offer to purchase, or they will blow up later.
What happens if the market price of the home is less than I originally bargained for? Can I get out of the rent to own deal?

How can I predict what the interest rates will be in order to raise the amount of mortgage I will need at that future time?

Can I still get a mortgage if the interest rates go up for all that I need?

Will I get my money back if I can't raise the mortgage?

What happens if the market price of the home is higher than what I originally bargained for?

What if the seller doesn't want to sell since he knows its' worth more than I bargained for?

What about things that go wrong with the house between now and then?

What is essentially happening in "rent to own" is that the landlord (seller) is saving money for you. This is something buyers can do on their own and maintain the flexibility of picking from many homes while working with a realtor at a time after pre-qualification takes place, which may or may not include the subject property.

The Bad -

In Nova Scotia, until the "closing date" occurs, the purchaser is still covered under the residential tenancies act, which means that each year, the lease must be renewed, which also means that each year, the purchaser has a chance to walk away from the deal, leaving the owner stranded, and back to square one.

I would also like to point out the potential for damage to your property; what happens if the tenant moves out and has caused more damage than his security deposit is worth?  The small claims court process in Nova Scotia takes much longer than most people think it should.

The Ugly -

Before entering into a rent-to-own agreementm be sure to do your homework.  As an owner, you want to make sure that your purchaser/tenant is well-qualified and can show you proof of that.  You also want to make sure that the purchaser/tenant is someone you can trust to live in your house.  The worst part of rent-to-own agreements, is the fact that owners quickly lose sight of the fact that they are now landlords, and have duties as such.  Not everyone is cut out to be a landlord.


Hopefully this answers some of your rent-to-own questions, and thanks for following.