Rent To Own: Benefits, Drawbacks and How It Works
Owning anything in today’s economy, whether it be a house or a new t.v., is usually a pipe dream for those with poor credit, no credit or not enough funds.
The concept of “rent to own” was created to aid those who could not make large purchases by presenting them the opportunity to rent with the option of eventually buying and owning the product or property.
Although most commonly associated with properties and houses, renting to own can also be applied to any tangible item such as vehicles, furniture, electronics and appliances.
How Does Rent to Own Work?
Renting to own, also known as “rental-purchase” or “rent to buy” is a legally documented transaction where tangible property is leased on a specified rental term (such as weekly or monthly) with the option to buy.
In most rent to own agreements, the consumer can choose at the end of each rental term whether they want to renew the lease or terminate the agreement and return the product.
Consumers can also choose to continue making payments for a specific and agreed upon period of time at which point they would own the product or pay off the remaining balance to obtain ownership.
Rent to Own Homes
Renting to own a home works differently than renting to own a piece of furniture or vehicle.
During the rent to own agreement, the consumer (or tenant) live sin the home and pays toward purchasing the property and a fixed price within a specific time period.
The tenant pays the rent as well as a “rent credit” which is used as part of the down payment on the home. Because of this, rent to own tenants tend to pay higher rent but are building a savings as they do.
At the end of the rent to own agreement, the tenant can purchase the property or walk away. The owner of the property retains the right to evict tenants who have no intention of buying the home.
The Benefits of Rent to Own Agreements
Rent to own agreements can be beneficial since they require no credit checks and no obligation to purchase. The consumer only has to agree to make the payments based on the agreed upon rental term.
This allows a consumer or tenant to use a product or live in a home while building credit and savings. At the end of the rental term, they can potentially have established good enough credit to get a loan or saved enough money to pay for the remainder of the product.
For those renting to own a home, that savings can be used to supplement the rent credit/down payment.
Rent to own agreements are great for short-term needs or if you want to try a product before you purchase it.
The Drawbacks of Rent to Own Agreements
Nothing is ever as good as it seems. There are significant drawbacks to rent to own agreements that need to be considered before entering them.
Even though the weekly or monthly payments may seem low, the long-term costs are generally higher than the value of the product – usually 2 to 3 times higher.
This means that if you rent to own, for example, a television worth $700, you could end up paying $2000 in the end.
Rent to own agreements are not considered to be loans or credits, nor are they considered as payment plans toward a property. The payments are made to a bank, not to the seller.
This means that if you walk away from purchasing the item, you are compensated for the money you paid into it during the rental term.
For rent to own home agreements, the payments during the rental term are not made to the seller against the purchase price of the house. So if a tenant chooses not to purchase the home, they lose all equity paid into it.
Legal Considerations of Rent to Own Agreements
Because rent to own agreements are legal contracts, it is easy to become confused over technical jargon. If looking to enter a rent to own agreement, it is recommended that you have a legal professional review the contract before signing.
Otherwise, here are some legal considerations:
Watch for incorrect or misunderstood contracts.
In the case of a rent to own home, if the contract is improperly written, the Canada Mortgage and Housing Corporation (CMHC) and the mortgage lender will not accept rental savings as a down payment.
Contracts may also have vague information when it comes to breaking the rent to own agreement. For instance, breaking the rental term length may result in losing deposits or money set aside for a down payment.
Our lawyers at Heritage Law can help you review a rent to own contract to ensure the terms are clear and properly written.
Be weary of inflated prices.
You may be okay with paying 2 to 3 times more the valued price of a property but, when it comes to real estate, this may be detrimental.
Sellers may have buyers agree to a higher price above the home’s value in order to secure more money from the sale.
However, if an appraisal for the mortgage is required, the lender will not provide a mortgage higher than the appraised value.
Know your legal protections.
Any contracts labeled as a “Consumer Lease” do not offer the same legal protections as loans or credits. These contracts are not regulated as are those by credit providers.
If you are unsure of what your legal protections are when it comes to a rent to own agreement, get in touch with one of our experienced lawyers today.