Rent-to-Own Agreements

The common thread of rent-to-own agreements is that the buyer will take possession and make payments to the seller over time and only upon payment in full will the seller then transfer legal title of the property to the buyer.

There are generally two ways in which a rent-to-own agreement is structured; (i) agreement of sale and (ii) rental agreement with option to purchase.

Agreement of Sale

In this type of agreement the purchase price is set out with blended payments of principal and interest overtime made by the buyer. The buyer has possession of the property during this time but no title is conveyed to the purchaser until the purchase price and interest is paid in full.

The buyer in these situations will benefit from building equity in the property, so long as they do not default on their payments. The seller benefits since the agreement is a purchase contract and as such the buyer is obligated to make the purchase or risk being subject to damages for failure to do so. Additionally, the property remains in the sellers name until the entire purchase price is paid.

An alternative type of agreement could be that market value rent payments are paid until a set purchase date. The drawback to this type of agreement though is the money paid by the buyer isn’t going towards the purchase price and there is no extra incentive for the buyer as only rental payments can be retained in the event of a default.

Rental Agreement with Option to Purchase

In this type of agreement, the person takes possession of the property as a tenant, making payments as a renter only until he/she exercises their option to purchase. At this point, the person becomes the buyer. The option to purchase in these cases is usually activated within a specified period of time and at a specified price. Sometimes, this type of arrangement includes monthly rental payments being made where a portion of the rental payment (usually above market value) being set aside by the seller towards the purchase price.

As opposed to the agreement of sale described above, equity is not being built in these situations. If the renter defaults, the agreement usually provides that the option to purchase is lost (usually together with any deposit and monthly contributions) which makes it easier for the seller to retake possession without having to reimburse the purchaser for payments. However, if the buyer does not vacate the property easily, the seller will have to rely on residential tenancy procedures to remedy the situation.

This type of agreement benefits a seller who is having difficultly selling their property as it provides an alternative to lowering the home’s price, taking the property off the market or a longer term rental situation. Additionally, they obtain income during the rental period which can assist in paying their mortgage, property taxes and insurance. Since the sale price is locked in once the agreement is signed, the seller knows what price to expect if the sale goes through and the price will not be affected if the market declines slightly during the rental period. Especially in cases where there is an option fee or a monthly amount being credited, even if the market does decline, the tenant will still likely be interested in buying the property out of fear of losing the funds already put towards the purchase. In the event the property is not purchased from the tenant, all rental payments made typically remain with the seller. It additionally gives the buyer incentive to take care of the property as they have a greater interest vested in the property than a traditional rental agreement. Overall, this type of agreement has the potential for the seller to make a good return on their investment.

This type of agreement also benefits a buyer who doesn’t yet have enough for a down payment on a home or monthly income to qualify for a mortgage but believes that within a couple years they will. The result of a rental agreement with option to purchase is an accelerated path to homeownership with the down payment being spread out over time. Additionally, depending on the agreement, during the rental period the tenant could take advantage of not being required to pay property taxes or insurance. As was the case of the housing market declining, should the housing market increase during the rental period the buyer benefits from having previously locked in the purchase price. The buyer has no obligation to purchase the home in the end and if they don’t, they would only potentially be out the money already paid towards the house if there is a fee or a monthly amount being credited. If their financial situation changes to a more favourable condition prior to the expiry of the option period, they can proceed with completing the purchase at an earlier date.

While rent-to-own agreements can have potential pitfalls, they can also be a win-win situation between a trustworthy seller and a prudent, financially responsible buyer. Before entering into this type of agreement it is important to ensure that all parties are aware of their rights, risks and obligations, and the appropriate clauses and terms that should be considered and included within these types of contracts. For more information or questions about rent-to-own agreements, please contact one of our lawyers.