Q: Hi Kyle, my neighbour and I were chatting about a property he owns in Surrey that he had on a rent to own agreement, but when it came for the tenant to purchase the property the bank wouldn’t allow it. Why don’t the banks like rent to owns? Thanks – Robert
A: Hi Robert,
Rent to owns are typically a no-no with banks not because they don’t like them, but because of how they are structured. A rent to own MUST be properly registered on title using the services of a lawyer to protect both the landlord and the tenant. The most likely reason that the bank did not allow it was because it wasn’t registered. The major issue with banks comes down to the down payment. If the RTO isn’t registered on title, with clear indication as to how much of the monthly payments are directed towards their deposit, the banks views this as an insufficient source of down payment, since the tenant will likely have a large, otherwise unexplainable deposit.
Typically on a RTO the tenant is charged market rents plus a certain amount for the deposit portion. In some cases there is also an initial deposit to secure the RTO contract. The contract will usually allow for the tenant-buyer to purchase the property at or between certain intervals, at a certain price. Here is an example:
Current value: $300,000
Current market rents: $2000/mo
RTO agreement: $2,400/mo ($400 per mo going towards deposit), with a $5,000 deposit, with an option to purchase the property for $310,000 after year one, $320,000 after year two, and $330,000 after year 3. If the purchaser does not purchase the property after 4 years, the contract is void and the landlord keeps the deposits (although this contract can be written in many different ways).
Why a landlord would entertain an RTO:
– Currently negatively cashflowing, and cashflow is expected to increase in the future.
– Currently negatively cashflowing and is a dog, reducing your ability to apply for more credit / mortgages
– To create a degree of certainty with their investment
– If the landlord wishes to sell but the market is extremely soft, they may enter a RTO to collect more cashflow in the interim until the tenant exercises the option to purchase
– Get a tenant that is likely to have strong pride of ownership and take good care of the property
Why a tenant may entertain an RTO:
– Poor credit currently, but on the path to recovery
– Good income but lacking the down payment
– Wants to get into the market but needs to be forced to save their down payment
– Has pride of ownership and wants to put money into their home, but want some form of reward (in this case, renovating the home that will soon be theirs)