# rent to own housing situation



## the-royal-mail (Dec 11, 2009)

I have done some searches in this forum as well as google but could not find very much posted. I was just wondering if anyone here had experience with living in or renting to someone in a rent to own situation. Consider a scenario with a renter wanting to buy the house but interested in rent to own until such time as a new job's probationary period has passed. It would be handled as an ultimate offer to purchase through realtor if job worked out. This allows the seller of empty house to get some rental income in the winter period (ie. now) and being able to sell the house to same person living in it. House would not be listed on MLS etc while it is occupied and if renter walked away the deposit and any rents paid until then would be forfeited.

Are there are rules or guidelines for these types of agreements? Deposits? Or is this all worked out between seller, renter/buyer and RE agent?


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## Just a Guy (Mar 27, 2012)

From what I've seen, and I'm not an expert I this area, you agree on a price and generally get a non-refundable deposit (which is usually a significant amount). You charge your regular rent (for a set period of time) plus extra over and above. The extra amount is banked by the owner as part of the purchase price and can be refunded if the deal falls through. At the end of the term, the buyer either needs to pay you, renegotiate, or walk away from the deposit.

You don't generally go through a realtor, but you should go through a lawyer.

There was a canadian ebook (free) I remember reading about this a few years ago, you could probably find it on google. If not send me a note and I'll see if I can find it.

The process is heavily in favour of the seller...personally, I didn't think it was a good way to buy.


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## marina628 (Dec 14, 2010)

We had this situation with a house we owned back in 2010 ,we consulted TD mobile Specialist and she advised us for the rent payments to be considered down payment we would need to open joint account and the funds would have to be deposited and held there until the adequate down payment was on deposit.So the owner would need to take the rent cheques and keep them there until you got your 5% down then you can do the deal using these funds.Most landlords would not really want to do that and you would have to factor in change in the housing prices in any agreement to be fair.


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## Rusty O'Toole (Feb 1, 2012)

I have done this as buyer and seller. Most recent experience involved selling a nice 3 bedroom 1 bath bungalow to a couple who had some credit issues. They were in counseling and remediation, and expected to be in good shape financially in 2 years.

I sold them the house with $20,000 down and a $169,000 VTB mortgage at 8%. It made a nice income for me, and helped them get a house. The mortgage was slightly less than I could have gotten in rent but it was hassle free.

At the end of the 2 years they refinanced at the regular rate, about 4% with a bank. They had no trouble getting a mortgage since they had so much equity (the house went up). And now their payment is only half the size.


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## the-royal-mail (Dec 11, 2009)

Thanks for all comments. 

Rusty, who came up with the terms you speak of? I suppose you had a lawyer draft up some sort of written contract for all of this? The reason I ask is because I am working on this with my RE agent and he has mentioned some things like a $2500 deposit which I would lose if I walk away from house, or else would go towards eventual purchase price. Details TBD.


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## marina628 (Dec 14, 2010)

Rusty is in a rare situation as not many rentals are free and clear to do a VTB Mortgage.A lawyer for yourself and one for seller is best IMO so you know you are protected.


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## the-royal-mail (Dec 11, 2009)

^ OK I had to google for VTB as I have never heard about that type of mortgage before.

http://www.investopedia.com/terms/v/vendor_take_back.asp

Yes, I see what you mean. That is indeed different than what I have in my mind as buyer is not asking seller for a loan. Basically looking at an offer to purchase on date X if job passes probation, with buyer occupying house and paying rent in the meantime. Has lots of advantages:

1. house is currently empty, so it gives the seller income immediately as house is not likely to sell until spring

2. means seller is released from paying winter heating bill in empty house

3. buyer gets into his preferred house immediately and does not need to move again if the job works out, simply completes sale at that point and seller walks away with minimal wait for closing date (buyer is ready with down payment cash)

And yes, I will definitely have a lawyer involved when the time is right.


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## marina628 (Dec 14, 2010)

It don't hurt to ask but many sellers won't want to tie up a home and become a landlord if they really want to sell.If this is a rural area and hard sell location then you may find seller is more willing to listen to your proposal.I can relate to empty houses and high heating bills


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## Just a Guy (Mar 27, 2012)

I think this may be the book I was talking about...

http://www.therealestaterenegades.com/free_book_download.html

I didn't download it again to make sure, but it rings a bell.


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## the-royal-mail (Dec 11, 2009)

Thanks for the additional comments. Yes, it is in a rural area where houses move slowly. The one in question was 142 DOM and listing expired before being renewed recently.

Thank you for the book link. I have downloaded a copy and will read the rent to own section.


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## Rusty O'Toole (Feb 1, 2012)

I bought a nice house, a 3 brm 1 bath brick bungalow built in the early 80s. It needed very little fix up, basically paint, new laminate flooring and a new water heater.

I tried renting it out but ran into some bad tenant problems so I put it up for sale. Response was slow so I told the agent I was open to something creative, like rent to own or owner financing.

He found a buyer who had bad credit, but was willing to buy for full price if I could carry them for 2 years while they solved their bad credit issues. They were nice people who kept their home spotless and both had jobs, but had a tendency to get carried away with the credit cards. They were in credit counseling. Their councilor approved them buying the house, as they were losing a larger house under Power of Sale.

This suited me as I could use a safe investment paying 8%. The deal was handled by my hip RE agent (not many know about these unconventional deals) and a standard RE lawyer, who drew up the papers for the sale and for the mortgage. From a legal standpoint, everything was conventional.

It happened that I was in a position to provide financing out of my pocket. But, if I had a mortgage, could have done a wraparound mortgage, or rent to own, rent with an option to buy, or swung the deal in any one of a dozen ways.


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## Rusty O'Toole (Feb 1, 2012)

As for the terms. I would not have sold without some down payment as I had a real estate commission and lawyer's fees to pay. The $20,000 figure was what the buyer could afford. The balance owing became the mortgage. 8% - 10% is common on private mortgages to people with bad credit. I did them a favor and let them have it on the low side because I thought they were a good risk, and would take good care of the property.

From the buyer's standpoint they got a nice house, when no one else would give them credit. Their cost was about the same as if they were renting but they owned their own home, were building up their credit rating, and had locked in the price at 2012 values. They knew in 2 years if they followed their financial plan, they could refinance and cut their payment by half.

From the seller's standpoint, I got a buyer for a house that I wanted rid of. I got a better interest income than I could get at any bank or financial institution. It was a very safe investment since I could sell under Power of Sale if they stopped making payments, and I had $20,000 cash as a down payment.

So for 2 years I had an income of over $1000 a month interest only, with no tenant hassles and no expense for repairs, taxes, insurance etc.

I was happy, the buyers were happy, the RE agent was happy, and the lawyer was happy. The deal worked out well for everyone.


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## Rusty O'Toole (Feb 1, 2012)

For a rent to own situation, your best bet might be to find a house for rent by a landlord who is sick and tired of dealing with tenants b*llshit. Offer to lease the house with an option to buy. Explain that you want to buy the house but will not be in a position to do so for a year.

You will need to study up on how this is done, there was a guy named Jeff Baubien in Ottawa who sold a book on this.

http://www.lease2purchase.com/

There are lots of rent to own RE gurus out there but his material is Canadian and not expensive.

It works best if you negotiate directly with the owner and leave the agents and lawyers out of it until it is time to buy the house.


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## Just a Guy (Mar 27, 2012)

I agree with rusty in that it can be fair, and a good thing. It can also be easily abused and used to prey upon those who can't afford to buy a house. I suppose that's true of a lot of things. If you're a buyer, be careful you choose an honest seller.


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## gt_23 (Jan 18, 2014)

the-royal-mail said:


> I have done some searches in this forum as well as google but could not find very much posted. I was just wondering if anyone here had experience with living in or renting to someone in a rent to own situation. Consider a scenario with a renter wanting to buy the house but interested in rent to own until such time as a new job's probationary period has passed. It would be handled as an ultimate offer to purchase through realtor if job worked out. This allows the seller of empty house to get some rental income in the winter period (ie. now) and being able to sell the house to same person living in it. House would not be listed on MLS etc while it is occupied and if renter walked away the deposit and any rents paid until then would be forfeited.
> 
> Are there are rules or guidelines for these types of agreements? Deposits? Or is this all worked out between seller, renter/buyer and RE agent?


I have closed a couple of these and considered a lot more than that. Considering the alternative lending channels that are available in Canada, if someone needs to do this option to own a home, they generally fall into one of two categories:

1) They have bad credit and small downpayment, but otherwise good income, can't finance in the traditional sense, and want to own a home at all costs.
2) They already own their home, but have lots of financing or liens on it and/or cash flow problems. They might also not be able to renew their existing mortgage for whatever reason. They want to stay in their home. As sad as it is, I have looked at a number of deals in this category with couples in their 60s and 70s.

Terms are set by you, but if you work with a RTO broker, they generally set the terms (which might be slightly negotiable). I'm not sure why you work with a RE agent on this, unless the RE agent specializes in these kinds of deals. Typically, they give you a downpayment of 5-10% on closing, pay you market rent, plus an additional monthly amount (option amount), which accumulates to give them 15-20% downpayment after the 3 year term. They handle most expenses and repairs as well.

Finally, it's hard to find good data on this, but from what I have learned talking to lots of people who do these is that there is a 50% or less chance they will purchase the property as per the agreement. You will have the option to take their deposit money and boot them out, or continue to work with them to eventually purchase the property. In any case, it's best to plan that you might not get your original investment and profit out of the deal on the agreed date.

In my opinion, these deals are generally never good for the tenant-buyers, however, are good for investors in one of two cases: you expect the RE market to be flat or decline, or you want a truly passive investment with good returns.


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## Rusty O'Toole (Feb 1, 2012)

Royal I would suggest if you are interested in pursuing this, you do some studying and prepare to set up a deal for yourself. You will do better than if you went for some rent to own advertizement.

The secret is not in finding a particular property but a particular seller. Or rather, a seller who is not particular if you get my drift. By that I mean someone who is open to doing a deal that is slightly unusual, is willing to listen and can understand you. I find my best shot is with a landlord or business person because they get it. Worst is a stupid unsophisticated person, they always say no because they don't understand, even if you offer them a better deal than they could get anywhere else.


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## sags (May 15, 2010)

Just curious how you would get around the law regarding security deposits in Ontario.

I believe a landlord can only require the first and last month rent. 

From what I have read........the companies that are doing this already...........

1) Set a predetermined price for the home.

2) The tenant pays the first and last month deposit.

3) The tenant pays a stipulated monthly rent.

4) The tenant pays an additional amount that is set aside in a trust fund to accumulate as a future down payment.

5) The tenant purchases the house at the agreed upon price on the agreed upon date.

6) If the tenant doesn't purchase the home..........they receive the funds from the trust account.

Few private sellers would be interested in such an arrangement for several reasons..........

They don't receive the capital from the home purchase until a future date. They acquire risk of damage to the property and the risk of non payment of rent....and the rental income is subject to taxation.

The tenants could very well claim the monthly rent to obtain a tax credit, so the CRA would be advised of the rental income.

It also may not be an acceptable arrangement to mortgage lien holders, or home insurance companies.

Ownership of the home may be an issue for them.

If a person buys a home and the vendor takes back the mortgage.........the sale proceeds the same as with any other lender, and ownership changes hands.

If a person is "renting to own".....they are tenants and do not own the property, until a possible future date. 

Hence the interest by the mortgage lien holder and the home insurance company.


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## NotMe (Jan 10, 2011)

This whole idea of 'rent to own' sounds like one is entering into a future's contract with people who can't balance their chequebooks, let alone understand high finance. From an investing point of view, the liquidity and default risks seem too high. Let's consider if the market declines after the rent to own purchase agreement is made; what person is going to buy a house for $600,000 that is now valued at $400,000 two years later? Particularly if they have no assets for you to go after. Seems to me there's easier ways to make money than this.


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## the-royal-mail (Dec 11, 2009)

^ What POV are you coming from? Remember I am thinking of a scenario where buyer is interested in house and has DP today, but is going there for a new job. RE moves slowly in that rural market but buyer does not want to commit to house upon starting new job. If job does not work out then they can walk away without being tied to a mortgage and losing money to RE commission, legal and closing fees. But if job works out, buyer remains in house and completes ownership tx without having to move again.


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## Rusty O'Toole (Feb 1, 2012)

In a lease option situation it is important to keep the lease and the option separate with separate documents. I also suggest you do some research before jumping into such a deal because there are traps for the unwary, and any such deal advertised is probably better for the advertiser than for you.

Royal is talking about setting up a deal where he has the right to buy a house but is not obligated to buy it, in other words, an option.


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## the-royal-mail (Dec 11, 2009)

Right. This is also a case where it was NOT advertised as RTO but was requested by potential future buyer/renter. From seller POV the house was off market due to long DOM and expired listing. Saves moving twice if new job works out.


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## NotMe (Jan 10, 2011)

I still don't understand what happens if the housing market significantly changes in the period from the day the RTO contract is signed to when it's executed. Seems then someone somewhere is po'd and possibly backing out of the deal, but hey different strokes for different folks.


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## the-royal-mail (Dec 11, 2009)

^ Hi NotMe, sorry for not addressing that very valid point. It is not a huge concern as this market is flat and about the only thing that will improve in the next 6 months is the spring "rush" of buyers, but prices are quite stable in this market. I guess both parties are at risk though, because if prices escalate as you suggest the seller may try to back out or if prices go down then the buyer may try to back out. I see it as a double edged sword. Remember this is in a small rural town with slow RE movements. Thoughts?


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## gt_23 (Jan 18, 2014)

NotMe said:


> This whole idea of 'rent to own' sounds like one is entering into a future's contract with people who can't balance their chequebooks, let alone understand high finance. From an investing point of view, the liquidity and default risks seem too high. Let's consider if the market declines after the rent to own purchase agreement is made; what person is going to buy a house for $600,000 that is now valued at $400,000 two years later? Particularly if they have no assets for you to go after. Seems to me there's easier ways to make money than this.


This comment makes no sense to me. Using a 33% drop in RE prices as justification to not do this type of deal is pointless, as it is an extremely unlikely scenario. If rational investors acted this way, there would be zero investment in any asset class, ever. Furthermore, in the event that prices do drop, your losses are partially offset by the downpayment and option payments from the tenant-buyers. This is the analogous to writing a covered call on stock you own, which is popular strategy in financial markets.

A 33% drop in market value is much more likely in the financial markets, where the historical record proves it can and does happen, yet this doesn't stop investors from putting trillions of dollars into it.

If you want to invest in real estate and accept the risks that go with that, in most cases RTO returns can beat buy-and-hold, unless the market is growing exponentially, while providing a much more passive investment.


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## gt_23 (Jan 18, 2014)

the-royal-mail said:


> ^ Hi NotMe, sorry for not addressing that very valid point. It is not a huge concern as this market is flat and about the only thing that will improve in the next 6 months is the spring "rush" of buyers, but prices are quite stable in this market. I guess both parties are at risk though, because if prices escalate as you suggest the seller may try to back out or if prices go down then the buyer may try to back out. I see it as a double edged sword. Remember this is in a small rural town with slow RE movements. Thoughts?


When I invest in real estate of any kind (RTO, buy-hold, flip, etc.), I usually look for multiple exit strategies. For example, since RTOs don't have the best chances of closing as per your original contract agreement, what else can you do with the property in the case things don't go as planned. Can you turn it into a buy-hold (renting it out) and cover your costs or better? Can you sell it quickly?

In most cases, rural properties are more difficult to rent out or sell quickly, which is why RTO deals involving them usually require higher downpayments from the tenant-buyers, usually on the order of 8-10%.


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## NotMe (Jan 10, 2011)

My only thought is it's hard to predict the future, and what I learned spending 10 years working for a small business is that leverage is all that matters. You either have it, or you don't. I'm not sure if in rto contract who has the leverage, but my money is on the people with the least skin in the game and the fewer assets to go after. Doesn't mean it won't work, but hey a public forum is a public forum.

At gt_23 - you really think that people go through on every transaction they're contracted to? We're not talking about the macro level of investing with warren buffets taking a flyer on something, we're talking about real people who can't qualify for a regular mortgage backing out of a deal, and maybe not having the assets to justify going after them. I think it might happen. I think the longer the term, the more variables in play, and the more likely a situation comes up. 

PS I don't understand how you can both acknowledge that huge drops in RE have happened, and recently to this small country to the south of us in a very short period of time, and then say that to consider that might happen is extremely unlikely. I merely suggest it as a possible risk, the point of a public forum on money in my opinion. As for your covered call example, it's not the asset holder I think is likely to default, it's the person contracted to buy the call that defaults.


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## marina628 (Dec 14, 2010)

The OP is known to be a very careful investor so I understand where he is coming from , sounds like a new job and a new move is in his future and he is smart not to jump in with both feet.Most of us would probably just rent for a while until the future is clear but sometimes in small communities there is not many rentals and very few sales.Coming from rural Newfoundland I hear of many of these deals where people rent a house then 2-3 years later end up buying it.


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## gt_23 (Jan 18, 2014)

NotMe said:


> At gt_23 - you really think that people go through on every transaction they're contracted to? We're not talking about the macro level of investing with warren buffets taking a flyer on something, we're talking about real people who can't qualify for a regular mortgage backing out of a deal, and maybe not having the assets to justify going after them. I think it might happen. I think the longer the term, the more variables in play, and the more likely a situation comes up.


Are we reading the same thread? 

No, I don't. In fact, I have acknowledged this already at least twice on this topic that they are unlikely to "go through" (close) on these RTO deals when the term is up. In this case, the investor is probably better off than if they had closed it, since you have the discretion to boot them out and keep their sizable deposit.



NotMe said:


> PS I don't understand how you can both acknowledge that huge drops in RE have happened, and recently to this small country to the south of us in a very short period of time, and then say that to consider that might happen is extremely unlikely. I merely suggest it as a possible risk, the point of a public forum on money in my opinion. As for your covered call example, it's not the asset holder I think is likely to default, it's the person contracted to buy the call that defaults.


Again, are we reading the same thread? I was referring to 33% drops in financial markets, not real estate. The fact that the US real estate market went down has no bearing on that of Canada, they are independent of each other.

Finally, with respect to the equity option example, the premium to buy the option (or in this case, the rent-to-own option) is paid up front, so there is no default risk. If they fail to pay the monthly rent or exercise the option at expiration, then you boot them out, keep their deposit, and start over again. In either case, there is no risk of financial loss to the investor, the option seller.


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## the-royal-mail (Dec 11, 2009)

^ Right. That's why I feel this is a win-win when the conditions are right. Even if the renter walks away at the end of the rental term, the seller collected rent, didn't have to pay heating and collected the upfront amount (whatever it may be). Of course, if the buyer goes through on the sale I suppose that fee and some % of the rent would go back to the buyer but the seller still collected rent for those months. Esp beneficial if all of this occurs in the dead of winter when buyers are cooped up in the city. Buyer wins as they get to test drive the house without being obligated at first. Ultimately I think marina understands the motivation for this quite well.


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## birdman (Feb 12, 2013)

A person I know had a rental property that I estimate that he paid, say 300,000. for and financed it with a conventional mortgage with a 25% down payment. While I can't recall the exact details, he wanted to sell the property and approached the current renter who really wanted to purchase it. However, the renters did not have the required down pymt. and also had poor credit. My friend the owner talked to his realtor and the entered into an agreement something along the following lines:

Renter entered an agreement to purchase the house sometime over the next 2 years. Hopefully, he would have the DP and clean up his credit during this time.
Renter would pay the full listing price for the house.
The purchase price would pay a non refundable deposit of 10,000.
The price would increase either 5 or 10% per year for the next 2 years.

Apparently the purchaser worked in the oil patch and made big $$ but didn't look after their finances. They really wanted the house. 

Well, DDay came 2 yrs later and as expected the renters could not qualify for a mortgage. 
To me it seemed like a losers game for the renter and a wine for the owner as the would get full price for the home plus 2 annual bumps of say 15,000. each. The house didn't appreciate much and was probably still only worth the original $300,000. I guess that in a rapidly rising real estate market things could be be different.
Anyways, the realtor worked with the renter and eventually purchased the property with help from his mother and everyone was happy. 
I believe there is the occasional realtor who has investors who will purchase houses and the rent them out on a rent to own basis along the lines described above. I thought about being one of those investors but decided to pass due to the complexity thereof and it seemed full of uncertainties and complications.


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## Just a Guy (Mar 27, 2012)

Notme,

There is risk involved, for the seller, he agreed on a price today (usually full asking price) against a possible increase in the furture. That's his risk, though he gets a full price that he wanted, so he shouldn't really complain. He also collects rent (the total rent collected does not usually go towards the purchase price, only a portion of it, so the seller get a two year cash flow as well). 

As for the buyer, his risk is usually the non-refundable deposit. I've usually heard numbers around $25k, not 2.5k. The first would be hard to walk away from unless the properties really dropped in price, the latter is much easier (probably why there is a significant amount usually). If the buyer's situation doesn't improve, they can also lose the deposit. The seller is usually better protected than the buyer.

These are not generally the best way to make a real estate transaction, that's why they aren't common. Of course, if you find a good seller and a good buyer, everyone can win.


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## sags (May 15, 2010)

Anyone who considers entering into such an agreement as a buyer, should take note of some scams in the past to avoid.

I remember reading about some guy who rented homes from people...........then turned around and advertised them as "rent to own".

He took people's down payment and they sent him the rent each month........which he forwarded to the real home owner.......minus the "extra down payment fee".

When the term was up and the people tried to get hold of him............he didn't respond.

When the home owners stopped receiving the monthly rent...........they showed up at the house and the jig was up.

The media got involved and discovered that he had done it to several different people.

Rule number 1...............make sure the person owns the house..........


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## Berubeland (Sep 6, 2009)

I'm not a big fan of rent to own, they tend to be predatory towards the tenant/buyer. In Toronto they are structured as follows, you pay a certain (above market) rent for the privilege of being in the home, then you get to put a downpayment on the house, many of these deals are escalation clauses so they assume a house increase of 5% per year. 

The problem is that most people that get into these deals have bad credit and are making poor financial choices... again. 

I did a few of these deals in a townhouse complex that converted to condo. The tenants paid $400 more rent than the same rental unit, they paid a down payment, and an additional amount went to their down payment. The escalation was 5% 

The only reason I could think of to do this deal is if you have bad credit but it was not a good deal. The owner of the property is no longer responsible for any maintenance but the tenant is generally encouraged to renovated the property. In one case the tenant took all the brick off the back of the house and also took off the back part of the garage to create a "drive thru garage" 

Then what if things go wrong? 

Well in Ontario there is no legislation and so two documents are signed the rental lease and the "offer to purchase" and in cases of non payment the "landlord" then evicts the tenant. But once the Landlord & Tenant Board became aware of these rent to own deals they declined to deal with them and kicked them up to Superior Court. But Superior Court has no jurisdiction on residential tenancy matters. Basically it really sucks to be the owner of these properties when they go wrong.


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## CharlesF.Donahue (Jan 7, 2015)

the-royal-mail said:


> I have done some searches in this forum as well as google but could not find very much posted. I was just wondering if anyone here had experience with living in or renting to someone in a rent to own situation. Consider a scenario with a renter wanting to buy the house but interested in rent to own until such time as a new job's probationary period has passed. It would be handled as an ultimate offer to purchase through realtor if job worked out. This allows the seller of empty house to get some rental income in the winter period (ie. now) and being able to sell the house to same person living in it. House would not be listed on MLS etc while it is occupied and if renter walked away the deposit and any rents paid until then would be forfeited.
> 
> Are there are rules or guidelines for these types of agreements? Deposits? Or is this all worked out between seller, renter/buyer and RE agent?


It is profitable idea for, you should go through a layer for it.


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## john3322 (Nov 24, 2014)

*Suggestion for Property*

From my point of view you should to hire a property manager. because of we exactly not known all the legal document of property and rules .


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