Rent-to-Own Homes In Canada: How The Process Works

A rent-to-own home allows the current tenant to eventually purchase the home. With this arrangement, a portion of each monthly rent payment is set aside to eventually contribute to purchasing the home. The purchase date is predetermined, usually one to three years into the future.

This arrangement allows the tenant to gradually build home equity, reducing the required down payment. The tenant may also need to pay an upfront, non-refundable option fee for this privilege. Furthermore, the tenant may lose their built-up equity if they don’t purchase a home by the established date. This will all be negotiated in the contract.

What’s in it for landlords? The landlords can enjoy a steady income from long-term tenants—who often take better care of the property, as they see it as their future home. This helps them save on maintenance costs since tenants usually handle repairs. Plus, sellers face minimal risk as they receive the initial deposit and rent, whether the tenant buys the property or not. They also have the flexibility to find new buyers or tenants if needed.

While the rent-to-own process varies, there are similarities across the board. Initially, the prospective buyer must pay an option deposit that secures the right to buy the property. Depending on the option type, the buyer must purchase the property or can walk away from the agreement. This deposit, which usually ranges from 1% to 5% of the agreed purchase price, often comes with a specified timeline within which the buyer is required to complete the home purchase.

The future purchase price is generally locked in, but the seller may negotiate to appraise the property as the lease nears its end. However, there’s always a risk that the property value has increased, which wouldn’t be great for the buyer.

Throughout the rental period, the buyer pays monthly installments, with a part of these payments designated to go toward the future down payment. The buyer may also be responsible for maintenance costs, such as property taxes and repairs.

Upon the rental term’s conclusion, the buyer can access the accumulated contributions and original upfront deposit. These funds can then be applied towards the down payment, provided the buyer follows through on the home purchase. If the buyer walks away, they will be liable for the negotiated contract terms.

Lease-Option Agreements (Flexible Purchase)

A lease-option agreement favours the buyer, as they can walk away from the purchase. The buyer is not obligated to purchase the property if they are unhappy with the home or cannot obtain suitable mortgage financing to buy it. While there won’t be additional penalties, the buyer might lose the funds they have contributed to that point.

Lease-Purchase Agreements (Binding Purchase)

A lease-purchase agreement favours the seller. The buyer must purchase the home at the end of the defined rental term. Financial penalties or legal issues can arise if the renter doesn’t buy the home as agreed initially.

Assume you plan to buy the home in three years, at which point the expected value is $500,000. The contract has an initial 2% deposit based on the home’s future value. As such, you’ll contribute $10,000 to the purchase price, with a remaining balance of $490,000. Assuming a minimum down payment of 5%, you’ll need $25,000, or $15,000 if the contract allows you to include the option deposit. However, keep in mind this doesn’t include closing costs.

Your total monthly payments are $2,500, of which $500 contributes to home equity. At the end of three years, you’ll have saved an additional $18,000 to contribute to your down payment. When it comes time to purchase the home for $500,000, you’ll have $28,000 in home equity after the down payment has been factored in. This means your remaining mortgage is $472,000, plus mortgage default insurance required for down payments of less than 20%. However, keep in mind that our example doesn’t include closing costs or maintenance that the tenant generally covers while in the renting phase.

• Agreed Purchase Price: $500,000
• Initial Deposit: 2% = $10,000
• Lease Term: 3 years
• Balance Owing After Term End: $490,000
• Minimum Down Payment: 5% = $25,000
• Monthly Rent Set at Market Rate: $2,000
• Additional Monthly Portion Allocated to Down Payment: 25% = $500
• Total Down Payment Saved: $18,000
• Remaining Mortgage Required: $472,000, plus mortgage default insurance

Rent-to-own regulations exhibit slight variations across provinces but generally prioritize tenant protections. These measures include upfront disclosure of all terms and conditions, mandatory allocation of a portion of each rent payment toward the future down payment, and a cooling-off period post-signing that allows for contract cancellation by the tenant/buyer.

Similar to when searching for a conventional home, available rent-to-own homes can range widely from condos to detached houses to acreages, depending on the available inventory within the housing market. Potential buyers will still need to qualify for a mortgage, and should be aware of the maximum purchase price for which they would qualify.

Here are some strategies for finding a rent-to-own home:

• Negotiate Rent-to-Own with Your Current Landlord: If you’re already renting and have a good rapport with your landlord, discussing a rent-to-own arrangement for your current property could be viable. This option offers convenience as you know the home, neighbourhood and landlord.
• Search Rent-to-Own Listings: Look for properties explicitly listed with the rent-to-own option, such as those from private sellers on Kijiji, Facebook Marketplace or specialty lenders like renting2own.ca. Homeowners facing challenges selling their properties might consider this alternative, offering you more choices.
• Engage a Rent-to-Own Company: Specialized rent-to-own companies facilitate connections between tenants and property owners and may maintain a portfolio of available homes. Working with a rent-to-own company allows you to select properties within specific price brackets and explore various down payment options.

• Gives you time to improve your financial situation (before you buy)
• Forces savings towards a down payment on a preset schedule
• Provides the option to lock in a set future purchase price at today’s prices

• If the purchase price is locked in, you risk overpaying if the housing market drops
• If the purchase falls through, you forfeit all accumulated rent credits
• Buyer potentially covers all maintenance and repair costs throughout the process

To spot potential scams, watch out for warning signs, like the landlord demanding substantial upfront fees or deposits before allowing access to the property. Be cautious of forceful requests for non-refundable payments, restricted access preventing a proper home inspection and unexpected additional fees not mentioned in the original contract.

Before making any payments or commitments, take action to ensure the security and legitimacy of the transaction. This could include: verifying licences, conducting thorough research, visiting the property and seeking professional advice.

Rent-to-own agreements provide a structured method for tenants to accumulate equity while renting, potentially easing the path to property ownership.

With that being said, exercising caution is key. These agreements have risks, including commiting to overpaying for a property in a volatile housing market and losing accumulated down payment credits if the purchase falls through. However, with careful consideration and a clear understanding of the terms, rent-to-own contracts can serve as a valuable stepping stone toward homeownership.