Rent to own fails
Have you ever heard of a rent to own agreement? An agreement between the tenant and the homeowner stating that a portion of the monthly rent is credited toward the future purchase of the property when the lease ends, typically 1-5 years. The arrangement might sound ideal BUT the actual practice potentially poses significant risks for both parties. In my 30+ years in real estate, I’ve never heard a rent to own transaction go well and actually have been affected myself when one of my own tenants attempted to defraud someone.
Years ago, I rented one of my properties with a 3-year lease for $950/month. 3 months later, I went back to my property to check on the tenant and do an inspection just to make sure the tenant was looking after my investment and no damages were done. When I rang the doorbell, a lady named I had never met before answered the door. I asked her if my tenant was around so I could get in.
Surprise, surprise! At that time she informed me that my tenant was not living there anymore and that she had bought the property from HIM with a rent to own purchase. When I informed her that the house was NEVER FOR SALE and that I was the owner, she almost fainted and of course, didn’t believe me. The next day I met with her with a copy of my land title to prove to her I was the owner of the property, not my tenant who was on the contract with her.
Here is what went wrong for this poor lady and how it happened:
- The first thing is my tenant made her sign a 3-year contract, rent to own with an increased value on my property of about $100,000.
- He asked her for a $3,000 non-refundable deposit. Keep in mind that these $3,000 was her lifetime saving and was representing a huge amount of money for her at the time.
- My tenant charged her $1150/month rent, so, $300 more than what he was paying me.
She was very lucky that I caught it only 3 months later by showing up at the house to do an inspection, otherwise she could have paid thousands of dollars into a house that she was never going to own in the end. I found a way for her to recoup her $3000 and pressed charges against my crooked tenant – who, by the way, had applied for a real estate licence. This is a true story and if you want more details, please reach out and I can fill you in.
So, what are some of the more specific pitfalls of rent to own agreements and why to avoid them?
You’ll most likely pay more in monthly rent than you would as a typical renter or than you would for a mortgage payment. And that extra money is not all going towards your purchase credit. Review the fine print and you’ll see the breakdown, often with a portion of the overage going to the owner as a fee for “saving” the money for the closing. You might not be saving as much towards the house than you’d think, even in the long run.
Most rent to own contracts include a non-refundable initial fee, usually based on the current value of the home, and can be between 2.5%-7% of the contracted purchase price. This cost could easily be saved as a down-payment for a conventional purchase, securing the money and earning interest while you prepare for your purchase. Keep in mind, this figure is based on the current value of the property…this can change drastically in 5 years, as could your desire to purchase this particular property. Really consider the implications of locking in the price of the home years before you purchase it.
Another aspect of a rent to own purchase that is often overlooked is the fact that most agreements include a condition that stipulates that the tenant is to pay for all repairs and maintenance to the property – unlike a standard rental agreement which puts repairs in the hands of the owner. Sellers don’t want to spend any more money on a home they are selling and assume you would want to have the repairs done to your satisfaction. So, while you don’t legally own the house, it is you who is responsible if an appliance breaks down or the hot water tank leaks.
As a renter, if you are late or miss a payment, you will be facing a late fee but with a rent to own? A late or missed payment could void the deal. Actually, there are many issues that can trigger a default in the contract like failure to make timely repairs or violating a “no pets” clause. Again, reading the fine print is so vital in these kinds of deals that are generally crafted in favour of the seller.
Rent to own situations are very vulnerable to scams and shady landlords with the tenant assuming the bulk of the risk. The landlord remains the owner of the home throughout the contract and gets to keep both the house and the additional paid funds should any default occur. The other most common issues reported by the consumer information report were:
- The landlord couldn’t legally sell the house because they didn’t actually own it
- The seller had years of unpaid property taxes
- The house had hidden issues, like foundation issues, old wiring or asbestos
- The house was in or heading towards foreclosure
My advice to buyers looking to get into the market? Take the time to prepare for your purchase. Save the down-payment, take steps to improve your credit score early and make sure you qualify for a mortgage before committing to any purchase. Don’t obligate yourself to a purchase that you may or may not be able to complete until you are ready. So much can change in terms of income, market value of the home, interest rates and more in a relatively short amount of time. Make sure you are in the driver’s seat when making the biggest purchase of your life and I’d be happy to help with a roadmap to realizing your real estate dreams. Visit me on Facebook and Google to be a part of the action!