Rent-to-own is a creative real estate strategy that is becoming very trendy these days. So why are sellers offering this option to potential buyers and why would someone enter into this type of agreement with a seller?
For real estate investors this can be a great alternative to the typical buy-and-hold investment strategy and in many situations, real estate investors aren’t even buying a property until they have someone who is interested in buying the home but for some reason they cannot buy it out right today.
So why would someone invest in real estate this way? An investor is getting a deposit upfront from the potential buyer, generally 5% to 15%. They are receiving monthly cash flow and they also have someone willing to buy the home at the end of the lease at a pre-agreed upon purchase price. The potential buyer is going to take care of the home like it is their own so the real estate investor can avoid some of the issues that come along with having renters in a property. They may even do renovations or upgrades that will increase the value of the home.
If the potential buyers do happen to walk away, the seller still has options. They still have the asset along with the initial deposit and the additional amount the renters paid above market rent that was to go towards a down payment. They can now rent out the property, sell the property or enter into another rent-to-own agreement with a new buyer.
Now why would a buyer enter into this type of agreement? Typically you would think that there are some credit issues that need to be resolved and this can sometimes be the case but you need to know that a rent-to-own agreement is not just for those with credit challenges.This could be an excellent option for someone who is self-employed or on commission sales with excellent credit but who may not qualify for traditional financing with the new guidelines for income verification. Or someone who is new to a career and does not qualify for high ratio financing because they do not meet the minimum employment requirements but has excellent credit.
A seller needs to ensure that the buyer can actually afford to buy the house and qualify for financing at the end of the rent-to-own term. The buyer needs to ensure that the rent-to-own agreement being used is compliant both with a potential lender and the mortgage insurer.
There are many reasons that a Rent-To-Own agreement is attractive to both buyers and sellers but whether you are a real estate investor or a potential rent-to-own buyer you need to work with a mortgage broker, a real estate agent and a lawyer to evaluate the situation to ensure that this will benefit you and you can afford to take the risk.
If you would like to learn more about Rent-To-Own real estate, you can contact me at 250-826-3543 or email april.dunn@mtgarc.ca
April Dunn is a Mortgage Broker who has been assisting clients to purchase, refinance or renew their mortgages for over 20 years. April is the owner and a Mortgage Broker with The Red Door Mortgage Group – Mortgage Architects and specializes in Strategic Mortgage Planning. April provides a full range of residential and commercial mortgage financing for clients all over the province of British Columbia and across Canada through the Mortgage Architects network. April can be reached at 250-826-3543 or april.dunn@mtgarc.ca