Whether you are already a homeowner or hope to become one, a contract to lease with an option to purchase may be the solution to your problems. However, it is best to get all the fact before you sign on the doted line.
What Does It Entail?
A lease with an option to purchase (or rent-to-own) is a notarized contract between the owner and the tenant stipulating that the latter may eventually purchase the property they are renting. The timeframe for purchasing the house varies, but it is usually a three-year period. For both parties there are advantages and disadvantages.
The Tenant’s Initial Costs
At first glance, such an agreement may seem ideal for the tenant. They can invest money into the desired property all while living there even though they are not the official owner. But there is a glitch! A rent-to-own contract generally requires that the tenant pay a certain sum which acts like sort of security deposit for the owner. The total amount varies, but it usually represents half of what a bank would require as a down payment, the equivalent of 10% of the home’s value. Moreover, the tenant will have to prove that they have a stable income and that they can pay the rental fees.
Benefits for the Tenant-Buyer
Often, the “down payment” that is initially deposited by the tenant will be returned to them in full when they acquire the property. A part of the rental fees that they have paid on a monthly basis may also be reimbursed, depending on what is indicated in the contract. However, they will have had to full meet the agreement’s terms and conditions. These vary from one contract to the other, but the main condition is that of paying the rent on time. Other than recuperating part their investment, another advantage for the tenant is that property values continue to go up. So, at the end of the contract, the house will no doubt be worth more than the price negotiated a few years ago in the rent-to-own contract.
Benefits for the Seller
Some houses can’t seem to find a taker on the real estate market for various reasons. Sometimes, the homeowners don’t want to or cannot wait several months for the tide to turn in their favour. For example, they may develop a health problem that prevents them for occupying the residence or they may have already acquired a new property. A lease with an option to purchase proposal is a good way to get rid of their property. Another advantage is that the owner receives a rental income during several months.
Disadvantages for One Party or the Other
For the tenant-buyer, the main disadvantage is the possibility that they might lose their security deposit (“down payment”) or the extra amount they paid every month to cover the capital if the contract is broken. Furthermore, the monthly rent the tenant must pay the owner is usually higher than what a regular tenant would pay. For the seller, the disadvantage is the risk that the tenant may change their mind and waste their time, or even damage the property and decide not to go through with the purchase.
Who Is This Option For?
Mainly, the people who opt for this kind of arrangement either don’t have a sufficient down payment or have had a mortgage declined by the bank. Also, we sometimes see this kind of contract between a parent and a child. For example, a mother buys a condominium for her son with the intention of reselling it to him in a few years. Some real estate developers also use this option to attract buyers and avoid having unoccupied condo units.
An Ironclad Contract
If you are preparing to sign this type of contract, remember to make sure that each condition is clearly stated. For example, who will pay for snow removal, the school taxes or pool maintenance fees. Usually, the tenant has the same responsibilities as a homeowner, so they must take care of maintenance and repairs. However, the owner usually pays for things like municipal taxes and insurance. If certain aspects are left to chance, conflicts could arise between the tenant and the landlord, which is not desirable.
In the world of rent-to-own, several types of contracts can be written up. It is better to seek advice from a broker, lawyer or notary to make an informed choice.
