RENT TO OWN CONTRACTS As you are no doubt aware, through moral suasion and mandated changes by Federal Government Agencies the lending guidelines and abilities of financial institutions has been curtailed. The rationale behind these cutbacks is debatable, but nonetheless they are here. How will this affect the marketplace and economy? One thing is for sure; it will slow down sales of marginal real estate transactions. Properties that do not show as well as others may not sell as quickly. Buyers that may have been close to the line previously will not qualify for mortgaging today. Historical evidence will show that these purchases and sales will be inhibited. This will lead to the emergence of the “Rent to Own” or “Contract of Sale” transaction. What is “Rent to Own”? In its simplicity, a purchaser(s) will enter into a contract to occupy a residential property, pay an occupancy fee that is divided into two portions. One part will go toward rent and the other part will become a credit to the agreed upon purchase price. Too often these agreements are entered into either by a “handshake” or a non-enforceable contract. When the purchaser is applying for mortgaging to complete the transaction, the financial institution will require a copy of the agreement that was entered into. A Rent to Own contract should be clearly written so the terms of the agreement are clear. The amount of the monthly payment must be specified, clearly defining the amount to be allocated towards the rent and the amount to be allocated towards the purchase credit. For example if the normal rent for that property is $1000.00 a month, then a payment of $1250.00 is $1000.00 towards rent and $250.00 towards the Purchase Credit. It is wise to have a bona fide third party, i.e. a property appraiser or qualified realtor, determine and document the rental component and purchase credit at the time of entering into the contract. The agreement should clearly point out which party is responsible for paying the property taxes, condo fees, special assessments by the municipality or condo corp, utilities, maintenance and repairs. It should also show an occupancy date and a realistic closing date of the purchase. If there is to be an option to extend the closing date for unforeseen circumstances, a clause to that effect must be included in the agreement. Normally a small deposit is given upon the signing of the agreement. Clarify that this is towards the Purchase Credit. Let us look at some of the pitfalls of this arrangement. To the Seller: The renters/purchasers may not maintain the property and then “walk”, leaving the owner/vendor with a distressed/damaged house needing many thousands of dollars of work to rehabilitate it. The owner may still have a mortgage on the property which he/she is responsible for. This may curtail his/her borrowing abilities to purchase other properties, including their primary residence. The owner/vendor cannot enjoy any appreciation of real estate values, but conversely can suffer depreciation. Therefore the purchaser may just walk away from the contract. If the vendor has a mortgage against the property, a leap in interest rates, could place the vendor in a situation where they must pay out of their pocket to finance the deficiency. There is generally no personal guarantee attached to the contract, therefore if the purchaser fails to perform on the agreement there is no right of recourse. To the Buyer: If the renter/purchaser cannot get mortgage financing when it is time to close the purchase, then the owner can simply evict them, keep their Purchase Credit monies and re-occupy or sell the property. If for some unexpected reason during the contract period they must move (job re-location etc.), they cannot sell their interest in the property. The purchase credit monies are forfeited. During the rental/purchase occupancy of the property they are not protected by the Residential Tenancies Act. They have entered into a business contract, and failure to perform their commitments will nullify the agreement, leaving the Vendor with the right to evict them and keep the purchase credit monies. If the vendor is experiencing financial difficulties, he/she may simply not make the property tax, condo, mortgage payments, and declare bankruptcy. The mortgage company will seize the property, evict the tenant/purchasers and sell it with no consideration to the renters’ purchase credit monies. The purchasers could sue for the monies but first they will have to come up with many thousands of dollars to retain a lawyer to sue a person(s) in bankruptcy! Why would a buyer enter into this agreement? -Conventional mortgage may not be currently available due to credit or employment difficulties. -No accumulated down payment monies. -Inexpensive option on escalating house prices. -Sense of ownership, without the commitment. Why would a seller enter into this agreement? -He/she may have a difficult property to sell. -The property may be rural, and/or unique -The market could be “soft” for selling -The vendor may be locked in a mortgage that is expensive to negotiate to payoff (see Devil in the Details #1) LINK Caution Before entering into these contracts both parties should consult a real estate lawyer a qualified realtor or appraiser and a knowledgeable mortgage broker.
Posted on: Fri, 04 Oct 2013 20:34:14 +0000
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