A Rent to Own agreement is a lease combined with the exclusive option to purchase the property after a certain amount of time. These agreements allow the renter/buyer to save up for a larger down payment over time and/or clean up past credit problems before purchasing.

But, a rent to own agreement can easily go wrong if the buyer doesn’t have proper legal knowledge when signing a contract. Buyers can end up losing a lot of money because they didn’t seek legal advice from a lawyer when signing their rent to own contract. 

Related: Buying and Selling Homes: Why Lawyers are Involved

How Does a Rent to Own Agreement Work?

In theory, a rent to own agreement will allow a potential buyer who cannot currently qualify for a mortgage, or one who cannot make a large enough down payment on a home, work towards building up a larger down payment to help them qualify while renting the home.

For example, a potential renter will put down a small down payment of $10,000 on a home. If the rent for that home should be $1,500, the renter will pay $1,900 with the extra $400 going towards the down payment. By the end of a three-year lease term, the renter will have a $24,400 down payment, including the initial payment. The would-be owner can then use the new down payment to qualify for a mortgage.

What Can Go Wrong With a Rent to Own Agreement?

While a rent to own agreement may seem like the perfect solution for those who cannot currently qualify for a mortgage, or those who don’t have the funds for a large enough down payment, there are a lot of potential hazards.

One of the most easily avoidable, yet one of the most common, is incorrect contracts, or contracts that are signed without full knowledge of what they mean.

If a potential buyer has to break the rent to own agreement for any reason they may lose their initial deposit. Further, some rent to own contracts may be written so that the renter also loses all of the money that was set aside for a down payment. In the example above, this would mean the renter loses not only the $10,000 original deposit, but also the $14,400 in extra rent they have been contributing to a down payment.

A contract that is written up incorrectly can also be a serious problem. This is because if rent to own contract is written incorrectly, the Canada Mortgage and Housing Corporation and the mortgage lender will not accept the rental savings as a down payment.

Sometimes a home seller will attempt to benefit by having the buyer agree to an inflated price in the contract. Not only is paying more than a home is worth an issue, but even larger problems arise when an appraisal is needed for a mortgage. 

For example, if a buyer signed a contract that they would pay $400,000 for a home, and then, a few years later when the time came to purchase the home, the CMHC required appraisal found the home to only be worth $300,000, the buyer would have a serious problem. A bank will not provide a mortgage for a higher amount than the property is worth, which means there is nothing for the buyer to do but come up with the extra $100,000 on their own. 

There are a lot of benefits to rent to own agreements, but there are also a lot of ways they can go wrong. The best way to ensure a rent to own contract is correct and suitable is to hire a lawyer who has experience with rent to own contracts and home buying, like Juriscorp Law Offices. Contact us for advice on your rent to own agreement today.