Rent-to-own works but beware the pitfalls
September 9, 2013
Here’s a situation that I get asked about on a regular basis – rent to own. In theory, this is a viable option for people who don’t have enough money for a down payment and/or who have a low credit score. It’s definitely not often I come across rent-to-own options in the city; in fact, I’ve only seen 1 in the last 12 years!
The tenant pays the landlord a set price every month – part goes towards rent and part goes towards a down payment. The goal is that at the end of the term (2-3 years), the tenant has boosted their credit rating and saved enough for a down payment so they can buy the home at a price that had been agreed to at the start of the tenancy.
There are definite advantages for both sides. The landlord has a guaranteed price at which they will sell the home in the future. They may have positive cash flow every month. They have a tenant who will most likely treat the home well because at the end of the term, the home will be theirs. The tenant is forced into saving for a home and has the advantage of time to rebuild their credit.
So what could go wrong?