Everything You Need To Know About How Rent-to-Own Homes Work in the GTA

As property prices rise in cities throughout the GTA, many Canadians are struggling to afford homes in their ideal locales. Meanwhile, tighter lending standards have made it more difficult for buyers to get approved for mortgages. Together, these predicaments have left many buyers unsure how to make owning a home a reality. 

That’s why we’re keen to introduce another option for buyers: rent-to-own homes. In this blog post, we’ll explore what rent-to-own homes are, the benefits of buying through the rent-to-own option, and the pitfalls a real estate specialist can help you avoid.

What Are Rent-to-Own Homes?

Rent-to-own homes are properties you can rent, just as a tenant would. However, you can use your rent payments to save for a down payment and eventually purchase the property. 

Once you’ve entered into a rent-to-own agreement, you pay a lump-sum option price to your landlord or seller. This option price secures your right to buy the property in the future. 

You then pay monthly rent, which is higher than market rent, so you can save rent credit. You can put this credit towards your down payment, whether you buy the property during your lease term or when your lease expires. Most leases last between one and five years. You don’t have to buy the property when your lease expires. But you’ll lose the rent credit you’ve saved if you don’t. 

If you enter into a rent-to-own agreement, your landlord can’t sell the property to anyone other than you during your option period. 

Agreements for Rent-to-Own Homes

Before you can enter into a rent-to-own agreement, you’ll need to sign two contracts with your landlord or seller. These contracts include an option-to-purchase agreement and a lease agreement. 

Some people think signing these contracts means you’re agreeing to pay a purchase price over time. But this isn’t the case. An option-to-purchase agreement isn’t an agreement for sale. Though you’ll be a ‘buyer’ under the contract terms, your rights and responsibilities will be closer to that of a tenant until you buy the property.

When reviewing your paperwork, you’ll probably come across some clauses to think carefully about. For example, most agreements state that the buyer won’t be able to buy the property if they don’t provide the full purchase price by the closing date. In this case, the buyer would lose the funds they have paid towards the home equity and the rights to any home improvements they’ve made. Therefore, we recommend seeking advice from an experienced realtor when considering rent-to-own homes. 

Your rent-to-own agreement will also detail the following.

• Rental price.
• Payment due dates. 
• Accepted payment methods. 
• Date to legally take possession of the property. 
• Contract expiry date.
• Who is responsible for utility payments. 
• Final purchase price of the property.
• Final down payment price.
• The proportion of rent that goes towards the down payment.
• Window of opportunity to buy.

Why Choose Rent-to-Own Homes?

The main benefits of rent-to-own homes include the following.

• You can enter a rent-to-own agreement on virtually any type of property. Whether you’re looking for a townhouse, single-family home, or semi-detached property, there are options throughout the GTA. This means you can move into your dream home before you can afford to buy it.
• You can buy a home through a rent-to-own program even if you have a poor credit score. During your lease term, you can repair your credit score and build your savings.
• As rent-to-own homes have fixed purchase prices, buyers in rising markets can enjoy good deals when finally buying the property. If your locked-in purchase price was $546,363, but the value rose to $570,000, you’d save $23,637. Of course, this is a double-sided benefit. If the value dropped to $500,000, you’d miss out on $46,363. 
• Buyers can save for a down payment over time, making home ownership easier to achieve for buyers on fixed budgets.

Pitfalls To Be Aware Of

Though there are many advantages of rent-to-own options, there are some pitfalls to be aware of. We advise working with a reputable real estate agent to help you navigate these challenges.

• If you don’t buy the property by the time your lease expires, you’ll lose the credit you’ve saved to make a down payment. In this case, you’d lose the equity on the property.
• If the value of the property drops by the time you’re ready to buy, you might not be able to negotiate a lower price.
• If you don’t pay your rent on time, you might lose your right to purchase the property.
• There could be issues with the property that you’re not aware of until you buy.
• Until you buy the property, you won’t have buyer’s rights over keeping pets, decorating, and other home improvements. Your rights will be more comparable to a tenant’s.
• As there aren’t any standardized rent-to-own agreement forms, some paperwork can be poorly drafted. However, a realtor can help you catch any loopholes.
• It can be difficult to source financial support from a conventional lender when trying to secure mortgage financing to pay a landlord. Some banks don’t recognize past payments as part of a down payment, which can make it difficult to secure a mortgage.

If you’re not sure whether rent-to-own is the best approach for you, our real estate experts can offer advice and guidance. For example, if rent-to-own isn’t right for you, we might be able to help you with a CMHC Flexible Down Payment Mortgage. This program combines full-featured mortgage products with the flexibility of owning a home without having to save for a down payment. The program allows buyers to borrow funds so they can put a down payment on a property immediately.

How Storey Collective Can Help 

When it’s difficult to buy a property the traditional way, Storey Collective can help you explore other options. Book a free call with Storey Collective to discuss how you can finally buy the property you’ve always wanted.