How Does Rent to Own Work in BC?

by Richard Morrison
February 23, 2019
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British Columbia is infamous for its sky-high housing prices. For many residents, owning a home seems out of reach. Rent to own programs offer a glimmer of hope for aspiring homeowners who can’t qualify for a traditional mortgage. But how exactly does rent to own work in BC? Let’s break it down.

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Key Takeaways

Rent to own lets you rent a home with an option to buy it later. A portion of your rent goes towards the home’s purchase price.
There are two types: lease-option gives you the option to buy but no obligation. Lease-purchase requires you to buy the home.
You’ll need an initial deposit, usually 2-5% of the home’s price. Monthly rent is split between rent and rent credits (savings).
At the end of the term, you can use rent credits plus secure financing to buy the home. If not, you lose credits but can walk away.
Rent to own helps those with bad credit or lack savings build towards homeownership. But you risk overpaying if home values drop.

What is Rent to Own?

A rent to own agreement lets you rent a home for 1-5 years, with a portion of the rent going towards eventually buying the home.

For example, if 25% of your $2,000 monthly rent becomes rent credits, after 2 years you’ll have accumulated $6,000 in credits to put towards the home’s down payment.

Rent to own caters to those who want to own but can’t currently qualify for financing. It gives time to improve credit and save up.

How Does Rent to Own Work?

Rent to own combines a lease with a purchase agreement.

The lease sets the rent amount and length of occupancy.

The purchase agreement gives you the option or obligation to buy the home later.

There are two types:

Lease-Option Agreements

A lease-option gives you the option to buy the home after the rental term, but no obligation.

You’ll pay an upfront option fee (like a deposit) of usually 2-5% of the home’s price. This reserves your right to buy later.
If you decide not to buy, you lose the option fee but can walk away penalty-free when the lease expires.

Lease-Purchase Agreements

A lease-purchase requires you to buy the home at the end of the rental term.

If you fail to purchase, you may face penalties according to your contract.
Lease-purchases offer less flexibility but more certainty for sellers.

How Much Are the Payments?

Your monthly rent is split into two portions:

Rent – Covers occupancy costs for the owner. Based on market rents.
Rent credits – A smaller portion (e.g. 25%) goes towards your down payment on the home. Accumulates in a separate account.

You’ll also need an upfront option fee (deposit), usually 2-5% of the home’s purchase price. This reserves your right to buy later.

For example:

Purchase price: $500,000
Option fee: 2% = $10,000
Monthly rent: $2,000
Rent credits: 25% = $500/month

Over 2 years you’d accumulate $12,000 in rent credits, plus initial $10,000 option fee, towards your down payment.

What’s the Process to Buy?

When your rental term ends, you can exercise your option to purchase using:

Accumulated rent credits
Option fee deposit
New mortgage financing

You’ll need to qualify for a mortgage to cover the remaining balance. Rent to own programs help improve your creditworthiness over time.

If you don’t have the income or credit to qualify for a mortgage, you’d lose your credits and deposit. But you can walk away without further obligation (for lease-option agreements).

Who’s Rent to Own Good For?

Rent to own helps those who:

Don’t currently qualify for a mortgage
Need time to improve credit score
Lack savings for a sizeable down payment
Have irregular income

It provides a pathway to homeownership through a trial period plus enforced savings.

You’re treated as a homebuyer-in-waiting, responsible for maintenance and repairs. The home is yours to personalize.

Risks and Drawbacks

You risk overpaying if home values drop below the locked-in purchase price.
Monthly costs are higher than rents for a comparable property.
You may lose all rent credits and deposit if you end up not buying the home.
Lease-purchase agreements offer less flexibility to walk away.
Unexpected repairs can be costly if you’re covering maintenance.
You won’t build home equity during the rental period.

So weigh the risks before jumping into a rent to own agreement. Shop around for good terms and work diligently to improve your finances.

FAQs:

Q: How does rent to own work in BC?

A: Rent to own is a program where a buyer or tenant has the opportunity to rent a home with the option to purchase the property at the end of the agreed-upon lease term. It is a way to enter into home ownership, especially for individuals with poor credit or who don’t have enough savings for a down payment.

Q: What is a rent-to-own agreement?

A: A rent-to-own agreement is a contract between a landlord or rent-to-own company and a tenant. It outlines the terms of the agreement, including the monthly rent payments, the agreed-upon purchase price of the home, and the length of the lease term.

Q: How does the rent-to-own program help you build equity in a home?

A: In a rent-to-own program, a portion of your monthly rent payment is typically set aside as a credit towards the purchase of the house. This accumulating credit helps you build equity over time, which can be applied towards the down payment or the purchase price of the home.

Q: What happens if I decide not to buy the house at the end of the rent-to-own agreement?

A: If you decide not to buy the house at the end of the rent-to-own agreement, you can walk away from the deal. However, you may lose any accumulated credits or additional payments made towards the purchase price. It is essential to carefully consider your decision before entering into a rent-to-own agreement.

Q: What are the benefits of rent-to-own?

A: Rent-to-own can be beneficial for individuals who are unable to qualify for a mortgage at the moment but want to work towards homeownership. It allows them to live in the home they intend to purchase while building equity and improving their credit. Additionally, rent-to-own programs provide an opportunity to test out the property and the neighborhood before committing to the purchase.

Q: How does the price of the home in a rent-to-own agreement get determined?

A: The price of the home in a rent-to-own agreement is typically agreed upon at the beginning of the contract. It can be either the current market value or a specific price agreed upon by the buyer and the seller or real estate investor.

Q: Can rent payments in a rent-to-own agreement be used towards the purchase of the home?

A: Yes, in a rent-to-own agreement, a portion of the monthly rent payment is usually set aside as a credit towards the purchase of the home. This accumulated credit can be used to reduce the purchase price or act as a down payment at the end of the agreement.

Q: What happens if the home prices decrease during the rent-to-own period?

A: If home prices decrease during the rent-to-own period, it could affect the buyer’s decision to purchase the property. However, the terms of the agreement should outline the agreed-upon purchase price, regardless of any market fluctuations. It is important to review the terms of the contract to understand the implications in such situations.

Q: Who is responsible for maintenance and repairs in a rent-to-own agreement?

A: The responsibility for maintenance and repairs can vary depending on the terms of the rent-to-own agreement. In some cases, the tenant may be responsible for minor repairs and maintenance, while the landlord or property management takes care of major repairs. It is crucial to clarify these responsibilities in the agreement.

Q: Can I buy the house before the end of the rent-to-own agreement?

A: In some cases, there may be an option to purchase the home before the end of the rent-to-own agreement. This option may include specific terms and conditions outlined in the agreement, such as paying a predetermined amount or meeting certain requirements. It is important to review the terms of the agreement to understand the options available to you.

Final Thoughts

Rent to own isn’t for everyone. But for determined buyers lacking today’s qualifications, it can provide a bridge to future homeownership.

Just ensure you understand the contract terms and risks involved. With hard work and sound planning, your BC rent to own home may become a reality.

Rent-to-own is a popular option for individuals in British Columbia who want to eventually purchase a home but may not have the means to do so immediately. With a rent-to-own arrangement, the renter has the opportunity to eventually buy the home they are currently renting. The process works by entering into a rental agreement with the option to purchase the home at the end of the lease.

During the lease period, the renter pays monthly rent just like in a regular rental agreement, but a portion of this rent is set aside as a credit towards the future home purchase. When the agreement expires, the renter has the right to purchase the home at a predetermined price.

This option allows individuals who may not have the financial means for a down payment or who may not meet all the requirements for a traditional mortgage to still have the opportunity to own a home. It’s important to carefully consider the terms and conditions of a rent-to-own agreement and to work with a knowledgeable real estate professional to ensure a smooth and successful transition from renting to owning a home.

Sources:
https://www.cbc.ca/news/canada/rent-to-own-housing-affordability-mortgage-developer-home-ownership-canada-1.6570642
https://www.canada.ca/en/financial-consumer-agency/services/loans/rent-to-own.html

Ready to turn your real estate dreams into reality? Contact Richard Morrison, Vancouver’s top realtor with 20+ years of experience. As a Medallion Club member and RE/MAX Hall of Fame award winning agent, he’s the expert you need on your side. Whether buying, selling, or investing, Richard’s personalized approach and deep market insights ensure a successful transaction. Reach out to Richard today at (778) 900-2235 and make your real estate journey seamless and rewarding.

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