Buying While Renting Is Tempting
A “rent-to-own” (or “lease-to-own” or “lease-to-buy”) home is an increasingly appealing option to homebuyers, both here in Calgary and across Canada. But when it comes to the details involved with this type of real estate purchase, a lot of prospective buyers and realtors are lacking some crucial information!
Fact is, rent-to-own real estate deals are a horse of a different colour – both a lease and a purchase offer, lease-to-buy property agreements involve some truly unique considerations... Luckily the good agents here at Elite Home Real Estate are here to give you the full low-down on this not-so-new (but definitely novel) approach to home buying!
Considering a Rent-to-Own?
While hard statistics are still scarce, it would seem like the majority of folks who are drawn to this option are millennials. When you think about it, this makes some logical sense – news stories about the “unique” financial realities that this generation is facing can be found everywhere. For many millennials, increased student debt loads, higher housing prices, new mortgage regulations, and “unorthodox” career paths have made it significantly more difficult for many millennials to buy a home the “conventional” way.
But these considerations are just some of the reasons why lease-to-own real estate in Calgary is gaining popularity. In addition, leasing-to-own allows folks who won’t currently qualify for a mortgage some extra time to get their finances in order and put away the funds needed for a down payment.
At first glance, this may sound like a decent option for potential homebuyers, but there are definite causes for concern and caution (which we'll touch upon further down).
Furthermore, for homeowners who are looking to sell, lease-to-own purchase agreements can be a trickier and less preferred real estate transaction. Rather than selling the property and receiving the full payment in good time, a rent-to-own purchase deal means a significantly longer-term purchase agreement that involves incremental monthly payments. Folks who are selling their property typically (and understandably) prefer to sell to a buyer who is able to pay them in full for the property within a relatively short period of time.
So though a lease-to-own property may potentially work for a certain segment of potential homebuyers, it is almost always not the first choice for home sellers!
So How Does a Lease-to-Own in Canada Work?
To begin with, lease-option agreements come in many different shapes and sizes… But, at their core, they're comprised of three distinct parts
- A Rental/Lease Agreement
- An Option-to-Purchase Agreement
- An Initial Deposit and/or Down Payment
1. Rent/Lease Agreement:
Much like any other lease, this portion of a rent-to-own agreement will set out monthly payments and due dates, timelines, any applicable grace periods and/or late fees, a description of the property, as well as the details of the parties who are entering into the agreement.
2. Option-to-Purchase Agreement:
This is the document that makes a normal lease a rent-to-own property. This part of the agreement will either give the tenant/buyer the option to buy the property after the previously agreed upon period of time (typically between 1–3 years), or it will require the tenant/buyer to commit to the purchase after this time period.
It will also include details about how much of the monthly payments will be put towards rent and how much will go towards the purchase down payment, how the final purchase price for the property will be figured out, the ramifications for violating the agreement, and any purchase option fee.
In addition to monthly contributions towards to purchase down payment, most lease-option agreements will also require an initial deposit in order to secure the deal.
3. Initial Deposit and/or Down Payment:
Though not a requirement 100% of the time, the vast majority of sellers will want an initial deposit at the outset. This deposit is often at least $5000, but the actual figure will depend on what the buyer and seller agree is right for them. This deposit is ultimately used towards the down payment that will be due after the previously agreed upon period of time has passed.
After the pre-established time period has elapsed, the seller will combine the accumulated monthly down payment contributions and the initial deposit to have the ultimate down payment ready. The buyer can then use this to help them qualify for a mortgage for the remaining balance.
While a rent-to-own deal may seem like a good idea for homebuyers, there are some things to be watch out for!
The biggest thing to watch out for is the details of the option-to-purchase agreement. As mentioned earlier, these agreements outline whether the tenant/buyer has the option or the obligation to buy at the end of the pre-established period of time. They also detail the ramifications of violating the agreement… And this is where it can quickly get tricky.
We have seen enough of these option-to-purchase agreements to know the devil really is in these details! Unscrupulous agents or sellers can (and often do) include a clause in this agreement that ultimately sees them keeping the deposit and any/all down payment money paid – whether you end up buying the property or not.
For example, a not uncommon stipulation in these agreements is that, should a purchaser not be able to purchase the property at the end of the contract – whether it’s because they still won’t qualify for a mortgage, or maybe a loved once gets ill, or whatever – then any and all deposit money is forfeit. This means that the tenant/prospective buyer has just lost out on tens of thousands of dollars.
Another frequent clause involves the final price of the property being tied to an established annual percentage increase. However, this increase may or may not reflect the true market value of the property when the time comes to purchase. Depending on the property’s location, the economy, property type, and a host of other factors, the ultimate purchase price may end up being significantly higher than the home’s true market value.
From the seller perspective, should the tenant/buyer ultimately not purchase the home then you’re stuck right back at square #1. For many sellers, this could mean having to carry two properties – their old home and their new one – and having to cover all the costs associated with owning both properties.
It’s because of the above complexities and cautions that we generally recommend that homebuyers bide their time and work on qualifying for a conventional mortgage.
Likewise, it’s due to these reasons that we also advise home sellers to follow the more conventional route of selling their property.
However, if sticking with the conventional methods of purchasing a home is simply not an option for you then we would strongly recommend taking your rent-to-own agreements to an experienced real estate lawyer before signing anything!
Looking for some more information about buying a home in Calgary? Then we’re the realtors you want to talk with! We have helped hundreds of clients buy and sell more homes than you can imagine, so you can be confident that we know our stuff.
Feel free to contact us with any questions you might have – we’re always happy to help!