Becoming financially prepared to buy a house is not easy for everyone, and more companies are assisting Canadians through options such as lease-to-own programs.
Simply put, a lease-to-own, rent-to-own or lease-option allows a tenant to rent the property with the option purchase it in future. The procedure usually takes one to three years and during that time, the tenant can work to improve their credit score and save for a down payment.
Two contracts are typically involved in this agreement: a lease and an option to purchase.
"As a tenant, you would pay a non-refundable option fee which gives you the option, without obligation, to purchase the property at any time during the lease term for a fixed price," says Andy Santoso, president at Strategic Housing Corp., Vancouver.
Usually, the owner charges a higher monthly rent, but a portion of it is credited towards the purchase price - or it's put towards the down payment. However, if at the end of the lease term the tenant is unwilling or unable to buy the property, he or she loses any of the 'equity' built up in it.
The qualifications for renters to enter into such an arrangement are similar to the landlord-and-tenant screening process. Companies usually carry out a credit check and the renter must provide references, proof of income and information on assets and liabilities.
The obvious advantage of a lease-to-own is that it helps tenants become homeowners sooner, while they accumulate a down payment and restore damaged credit.
However, there is no guarantee that they will qualify for financing.
Many lease-to-own companies work with their clients to best prepare them to qualify for a loan at the end of the lease term. This is accomplished by advising the tenant about healthy credit habits and allotting a portion of the monthly rent towards the down payment.
Home Owner Soon Inc. of Toronto, for example, works with clients to direct about 20% of their monthly rent towards a down payment.
"We use a buyer selection program," says Mark Loeffler, investor relations at Home Owner Soon. "We approve the candidate first and then help them find the right house. This is good for many reasons, as they can choose exactly the one they want and stand a better chance of purchasing it at the end of their term."
The process can take anywhere from four to six weeks and approvals, usually, about 48 hours, provided the applicant has submitted their supporting documentation. Once approved, the client can view properties with one of the company realtors, who keep the interests of both parties in mind.
The method of getting involved in a lease-to-own is similar to any other investment dealing with tenants, in that all references and proof of income should be verified. However, it differs slightly in the way it is advertised because renters must understand the terms of the agreement.