Whether you are a landlord or tenant, you’ve probably wondered about rent-to-own agreements at some point.
If you live in Prince George, BC, Realtor® Keven Braet says rent to own properties are difficult to find for one simple reason: most landlords would never want to offer them.
In most situations, rent to own properties are only advantageous to tenants, which is why most landlords simply won’t enter into this type of agreement.
When landlords do offer a rent to own option, it’s usually because they believe they have limited options themselves and are misinformed about rent to own properties.
Keven says it’s the landlords who take on all the risk in rent to own situations.
“Under BC law, you can only attribute a maximum of 25% of the rent towards a down payment each month. Let’s say the rent on the property is $1000 a month. $250 of that can legally go towards the down payment. If the rent to own collapses, the tenant gets their down payment back, which means the landlord was only getting $750 a month for rent, and the tenant can walk away from their commitment to buy the home.”
Fluctuations in the market will also affect the value of the home before it is finally sold.
As Keven explains, “Let’s say the house is worth $200,000 at the time the rent to own agreement is signed, and the tenant agrees to purchase the house for $200,000 one year from now. When that year is up, if the house value has gone down, the tenant can walk away with their down payment and find a better deal. The landlord now has to find a new buyer and will get less for the property than if they had sold it a year ago. However, if the market goes up by $10,000 during that year, the house is now worth $210,000, but the tenant that reaps all the benefits of the increase in the house value because they will be buying at the agreed price of $200,000.”
Tenants should be aware that there is usually a higher cost involved in purchasing through a rent to own agreement. To compensate for the risks involved, most landlords offering a rent to own option will charge a premium for the home.
A Better Way
Landlords don’t have to put themselves at risk, even if they do want to offer their tenants an option to buy the home.
Keven advises setting up two completely separate contracts: a standard agreement to rent the home and a standard agreement for the sale of the home. The agreement for sale will be slightly different from a standard sale contract in that the closing date will be a year or two down the road instead of a few weeks away.
“This sale agreement is a binding contract that offers protection for the landlord while still giving tenants the opportunity to save for a down payment while they rent. The deposit will increase each month and will be non-refundable.”
Rent To Own Agreements Aren’t Worth The Risk
While they may work out well for some tenants, Keven says rent to own agreements just aren’t worth the risk for landlords.
“I would never use them or recommend them for my clients. Most landlords that sign a rent to own agreement are misinformed and don’t understand that there’s a better way of doing it.”
If you need advice about selling a property in Prince George, BC or surrounding areas, get in touch with our expert Realtors® at Team Powerhouse Realty.