Rent to Own (RTO)
Rent To Own contracts are more than just paying rent to the Landlord and applying the rent toward the purchase of the property. There are details that you need to know when entering into a Rent To Own contract.
What is Rent to Own (RTO)?
Initially, a contract is signed just between the renter (buyer) and the Landlord (seller). The contract will state an agreed price, length time of renting to own, and market rent amount. The surplus of rent that is being paid above market rent will be going towards the down payment of a house. For example, market rent for the property you are renting to own is $1000.00; you and the seller have agreed that you are going to pay 1400.00 each month. This means 1000.00 will go towards the rent and the additional 400.00 will go towards the down payment.
Setting up your Team
Right off the bat, the client will want to work with a team of property purchase professionals that will strategize action steps to make the RTO process seamless. The “Team” we are referring to would be:
- MORTGAGE PROFESSIONAL
- They will help with your preapproval, advise on improving your credit or increasing your employment income if needed.
- The mortgage professional also understands the lender policies and guidelines for RTO contracts and can make sure the RTO is properly set up.
- SOLICITOR/LAWYER
- Make sure that your lawyer is familiar with RTO contracts and that they work closely with the Mortgage Professional who knows what the lenders is going to expect.
- This is a KEY relationship and it should be formed with care and with consideration.
Over time the down payment continues to grow. At any time, you can add in lump sum payment(s) to the down payment, simply by giving the landlord a larger rent cheque,
Two Tips to keep in mind:
- The RTO contract should stipulate the down payment is nonrefundable
- Layout the terms and read through them with both the lawyer and mortgage professional to make sure everyone understands them.
The Contract
The contract is the most important aspect of an RTO. Things to keep in mind include:
- The RTO must be registered on title using the services of a lawyer/solicitor
- The contract will include the purchase price along with the term of the RTO agreement. Negotiations of the purchase price will be based on market trends of the area in which you are buying.
- The seller (landlord) cannot change or get out of the RTO during the term of the contract
- If the RTO is in place you can “sell” the contract to another buyer who will assume the contract to recoup your down payment. The price is usually the down payment amount you have already payed to the landlord.
- A clear account history of the surplus of rent paid that is acting as the down payment of the RTO. Lenders will want to see banking statements showing the accumulation of “excess” rent that was paid over the agreed market rent outlined in the RTO contract. Important for the seller not to spend this down payment during the course of the contract.
A Rent To Own contract could be the answer for someone who is renting, but having a hard time getting financing due to income, credit or not having their down payment together. RTO contracts usually are between 1 and 5 years long and can give the client the time they need in order to implement strategies on increasing their down payment or even improving their credit or income. In the Lower Mainland, RTOs are becoming more popular as housing prices are increasing and renting seems inevitable. In fact, there are properties that are being built with RTO financing in mind.
