Why do some people consider
Rent-To-Own Homes a Costly Program?
Lease Option is it a costly program?
Yes! There are numerous good alternatives
before jumping into a Rent-To-Buy Program.
Firstly, let me explain you what Rent-To-Own Homes mean?
It is also known as Lease Option-To-Purchase | Option Purchase.
Option Purchase means you are not Buying Today but Tomorrow.
This Tomorrow can be anywhere from One Year to Five Years.
It is important to understand that there is a Buying component
to this Renting-to-Own Purchase format.
There is also a down payment requirement.
Initial deposit plus per month amounts towards down payment.
Initial deposit amount varies within numerous companies in the
market offering various Lease-To-Purchase program.
Companies may also have other requirements or pre-requisites.
How to Find Best Rent-To-Own FREE Listings in Toronto GTA
To start with this program, you are basically
having a delayed mortgage procurement.
Investor / Seller needs to assess in how many
numbers of years you will qualify for a mortgage.
Your income will determine the purchase price of the property.
General thumb rule is 4.5 times the income for a Condo and
5 times the income for a Freehold Property.
Your credit score will determine the amount of down payment required.
Most investors prefer 1 – 2 years for a Rent-To-Buy Option.
Investors favor Freehold properties to a Condo purchase.
Investors like areas where properties are appreciating.
Understand Investors pays for the closing costs.
Generally, the closing costs are 2.5 times the purchase price.
Investors may also have to pay real estate fees if the Lease-To-Own client defaults.
Real Estate fees are about 5% of purchase price.
Investor may also incur other charges, property taxes etc.
Investor from all of the above is close to a 10% negative start.
An important observation to keep in mind.
Don’t get the Car Leasing format confuse you with Home Option Purchase.
Lease-To-Purchase Homes are very different from a car leasing.
Car values go down whereas Home Values mostly appreciate.
Now let’s discuss your reasons to dwell in this Lease-To-Purchase Option:
- Don’t have initial deposit / down payment
- Self Employed
- Small Business Owner
- New to Canada
- No established credit
There are numerous program where you can get assistance with initial deposit.
- Bank Cash Back Program
- Funds from RRSP
- Builder’s Cash Back Program
- Some Cities Have a Cash Back Program
- Seller Financing
- Money from family / friends
Now let’s consider some other scenarios:
- Poor Credit
- Past Bankruptcy
- Consumer Proposal
Even with the above there are some B Lenders willing to assist.
Next let’s review a Regular Home Purchase.
Purchase Price: $400,000 [A]
Per Month Mortgage amount: App. $2,000 + Utilities ($300)
+ Home Insurance ($100) + Property Taxes ($300) = App. $2,700 per month.
Assuming Property appreciates app. 5% per year.
Property Value after 5 Years: $500,000
Mortgage balance after 5 years: App. $340,000 [B]
Now let’s review the above as a Lease-Option Deal.
Purchase Price: $400,000
Per Month Mortgage amount: App. $2,000 + Utilities ($300)
+ Content Insurance ($50) + $500 towards down payment. = $2,850 per month.
Assuming Property appreciates app. 5% per year.
Property Value after 5 Years: $500,000 [C]
Down Payment Adjustment $500 X 60 months = $30,000.
Lease Option Buy back purchase price: $470,000 [D]
Let’s calculate the difference in the above two scenarios:
$150 per month amount X 60 months = $9,000
$470,000 [D] – $340,000 [B] = $130,000
Total difference = $139,000
[Though the Property appreciated by only $100,000]
So yes it is a costly program because you approximately overpaid by $39,000.
But if you consider per month rental amount wherever you are renting
to be around $1,500 per month X 60 = $90,000 then you are way ahead.
Some of the Pros and Cons in the above Option-To-Purchase Scenarios:
PROS
– Property value can appreciate more than 5% per year.
– A shorter than 5 Years term can even save you more money.
– You can rent out a portion of the property and save more.
– You are the proud owner of the property from day 1.
CONS
– The property may not appreciate but you are locked in with the final buy out amount.
– You may not qualify for the final purchase price.
– You cannot afford the higher per month amounts.
– Your Credit is not repaired in time and you can loose all your amounts.
Important: Investor can purchase any property to facilitate Prospect Buyer’s Rent-To-Own Purchase.
Call / Email me to discuss if you think Rent-To-Own is a costly program.
For more info and FREE Rent-To-Buy Purchase Listings visit: http://www.ManojAtri.com/Tour_Homes
Manoj Atri, REALTOR® C: [416] 275-2089 / [416] 494-7653 E: [email protected]