February 15, 2023

Rent-to-Own: An Answer to Home Ownership?

In our highly competitive real estate market, constantly fluctuating due to supply and demand, the path to home ownership can be quite a challenging adventure! Nevertheless, there are a number of possible avenues to becoming a homeowner, including the rent-to-own option. This solution, however, can be complex and not for everyone, as pointed out by the Organisme d’autoréglementation du courtage immobilier du Québec (OACIQ). This article discusses the pros and cons of this option, including the obligations and risks for each of the parties involved[1]. You will also see how a real estate broker can help you analyze the various possible scenarios so that your dream of owning your own home with the best possible terms and conditions becomes a reality.

1. What is rent-to-own?

Renting a condo or house with the goal of eventually owning it is a particularly interesting solution for potential homebuyers who are not eligible for a conventional mortgage or who do not have the required down payment.

In some cases, obtaining a mortgage can be particularly difficult due to:

The buyer’s financial situation
Mortgage financing rules
Condition of the property

With the rent-to-own option, the tenant signs a lease stipulating the possibility – but not the obligation – of purchasing the condo or house at the end of the rental period.

2. Pre-occupancy and the Promise to Lease With Option to Purchase are not one and the same!

Leasing with an option to purchase (rent-to-own) applies only to renting a property. In this situation, the tenant agrees to rent the property while having the option of buying it at the end of the rental period under terms previously agreed to between the parties. This article discusses this particular situation.

Pre-occupancy is part of a property’s sale process. In this situation, the buyer has already agreed to purchase the property and has signed a Promise to Purchase. However, the buyer wants to move into the premises before the deed of sale is signed.

3. Different possible scenarios

In general, renting-to-own is advantageous to tenant-buyers who wish to improve their credit since the amounts paid in the form of rent is applied to the down payment. With this option, you can also set out the terms and conditions of purchase in the lease, such as the price and obligations.

On the other hand, with rent-to-own, the seller can find a tenant willing to properly maintain the unit or building, while still earning rental income.

Here are three different scenarios to consider with your real estate broker:

A Promise to Lease - Residential: an agreement to rent the premises that includes a condition in which the renter can purchase the property within a predetermined time.
The right of preference (right of first refusal): while the owner has the right to try and sell the property, the tenant has priority over other potential buyers. This scenario allows the tenant to purchase the property by presenting a Promise to Puchase, as in the previous situation.
Simultaneous presentation of a Promise to Lease - Residential and a Promise to Purchase. With this method, not only are the rental terms and conditions set out in advance, the terms and conditions associated with the sale are also specified, such as financing, the pre-purchase inspection and signing date of the deed of sale.

4. Obligations and risks for each party

With rent-to-own, the obligations of each party differ according to the contract. Consequently, throughout the duration of the lease, the tenant-buyer has the same rights and obligations as those set out in the Civil Code of Quebec. When the property is bought, the rules governing its sale apply.

Moreover, there are very distinct risks for each of the parties involved. On the one hand, the tenant-buyer risks losing the sums paid as rent if they do not exercise their option to purchase or if the property is sold to another person. On the other hand, the owner must honour the tenant’s right to remain in the premises if the sale does not take place. Moreover, tax considerations, such as capital gains, need to be addressed.

5. The broker’s role

Contrary to what many might think, a real estate broker is a valuable ally for your rent-to-own project. As brokers are regulated by the Real Estate Brokerage Act, they must diligently verify, inform and advise in the same manner as any other real estate transaction.

Due to their on-the-ground experience and in-depth expertise, brokers provide excellent advice on various aspects such as:

Duration of the lease
Rental terms and conditions
Deadline to exercise the option to purchase
Selling price
Inclusions and exclusions

A broker can also assist you if the owner no longer wants to sell the property.

Selling, buying, or renting: a real estate broker is there to walk you through each step of a real estate transaction. For a positive experience and peace of mind, browse our directory to find the right broker for you.