Rent or Buy II?

Rent or Buy? II

Toronto streetscape. Original image at http://www.juliekinnear.com/toronto-images/moore-park-real-estate/400x400/moore-park-house-nine.jpg

Two other choices

Last month I dealt with the argument for starting out by renting something instead of buying it. I also mentioned that the Rent To Own and Renting With An Option To Buy ideas are two other approaches that are worth considering in certain circumstances.

The case for them is likely to be a financial one (for example because you don't have a downpayment) rather than any hestitation about choosing a permanent residence when you're relocating and aren't very familiar with the new area and somewhat unsure about where the best place to live -- and obtain value -- happens to be.

Unfortunately, though, the two options tend not to be all that available in most of today's markets. Back in the 90s they could often be found, but this was when Sellers were unquestionably faced with a Buyers' market and, worse still, likely to see prices dropping every month or so. It therefore seemed useful to offer potential purchasers a decided incentive to make an offer. In effect, the traditional need for a downpayment was set aside and it was possible for people to rent a property with one of two agreed upon rights to eventually become its owner.

Since then, however, the market has recovered from -- and invariably advanced beyond -- the economic doldrums of what I'm given (as you may know) to calling the Mulroney error. Moreover, the banks have become a great deal more liberal in their willingness to finance house purchases. Into the bargain, they've come to show a lot less interest in backing Rent To Own and Renting With An Option To Buy transactions.

A shame perhaps, but I guess it's part of progress -- in Canada at least.

Only in Canada, eh?

In my January newsletter, I maintained that the US market fallout was unlikely to spread across our borders. The root of it lay in sub-prime mortgages arranged by American lenders that made it too easy for people to buy what in all reality they had little or no hope of paying for. In contrast, not only was our economy stronger, but also Canadian lenders were -- and still are -- less inclined to cast caution aside.

Even so, the past few months here in Niagara (and other communities) have seen a somewhat slower sales rate. Listings aren't moving quite as quickly as they did and bidding wars have become much rarer than they were. However, most Canadian agents are falling back on the longtime belief that "sales come and go and sometimes you have to work harder than usual to obtain them."

Small comfort no doubt to sellers (not to mention listing agents) who are wondering where all the buyers have gone, but no one in authority is likening the situation to the problems faced by so many US households.

A possible resurrection?

Nevertheless, if we are starting to witness a return to a Buyers' market -- although I, for one, have yet to be convinced of it -- some sellers (and their listing agents) may well see merit in reviving the Rent To Own and Renting With An Option To Buy concepts. The likelihood is much greater in the US as a way to dispose of excess inventory, but our local market(s) may also begin to re-introduce the ideas to generate sales for properties that are lingering much longer than anyone wants.

In any case, despite the reservations in this newsletter, I think I owe it to my readers to walk through the specifics of the two ideas. If nothing else, it will allow me to make my comments so far somewhat clearer.

So then ...

Rent To Own

The essential idea is that as a tenant you get the seller/landlord to agree that you can (and indeed will) eventually purchase the property in question.

The rent amount and the purchase price are subject to negotiation, but usually the rent includes an amount that's above the norm and is treated as an accumulating downpayment. At the time of purchase, the total extra payments are deducted from the selling price and a mortgage is arranged for the balance due to the seller.

As a buyer, your benefit is that you can move into the house before you have the downpayment saved up and, dependent on the agreed upon purchase figure, can strike a deal at today's price rather than tomorrow's.

Needless to say, the seller has to be open to what you consider to be fair, but his/her benefit lies in an immediate sale (albeit of a different kind) rather than what might be a long wait to find a buyer.

Renting With An Option To Buy

This idea doesn't commit either you or the seller to an eventual transaction. but it does ensure that as a buyer you have what's called the First Right of Refusal. In other words, although the seller can consider an offer from someone else, he/she is then bound to give you the chance to buy the property instead.

Both the rent amount and purchase price are subject to negotiation, of course, but there isn't any accumulating downpayment involved. The rent will be a market one and the price may reflect the present value or an anticipated figure in the future.

Your benefit as a buyer is the time you're given to decide whether or not to make the property your own. You have chance to weigh up the pros and cons and, in effect, to be no worse off than the rent you pay while making up your mind.

As far as the seller is concerned, he/she at least has an assured rental income until you elect to buy -- or, if you decide not to do so, to possibly have you agree to simply remain as a tenant.

Arranging the paperwork

The real estate industry's Agreement of Purchase and Sale pages don't readily lend themselves to either of the ideas, especially because there's an absolute need for wording that unmistakably spells out the terms agreed upon by the buyer and seller. Like as not, however, these can usually be located in the Schedule A that forms part of an offer, despite the difficulties that arise when it comes to "fill in the blank" lines such as price, deposit, and closing date on preceding pages. Even so, though, the phrase "see Schedule A" can invariably be used to overcome this problem.

What is important is the incorporation of the mutually agreed figures for rent and purchase price, as well as the date that applies for concluding the transaction.

A Rent To Own agreement will include the extra amount that's going to accumulate as a downpayment, the period of time that applies to this accumulation, and the purchase price balance that will be due to the seller on closing.

A Renting With An Option To Buy agreement will specify the rent, the envisaged purchase price, and the date by which the buyer is required to exercise his/her option.

In both cases, the purchase price can be either agreed upon in advance or it can be subject to an appraisal at the relevant time.

In general you can rely upon the agents from both sides of the transaction to get the wording correct, but it will do no harm to have any offer include a clause that allows you a few days to have things vetted by your lawyer.

Getting a mortgage

Not many lenders are willing to commit to a mortgage in advance, especially when you're probably looking at a couple of years to build up your downpayment or to arrive at the time to exercise your option. Even so, you're well advised to have a bank official or mortgage broker look your offer over.

Not the least reason is the rules that the Central Mortgage and Housing Corporation (CMHC) nowadays tends to impose on these "non-standard" transactions. Without worrying you unduly about them, suffice to say that an offer cannot exist after the fact, but MUST have been created and signed in the beginning.

Yes or No?

In spite of all I've said, I'd be remiss if I encouraged you to view either of these ideas with great enthusiam. There are circumstances when they do make sense, especially when you don't have a downpayment or can't be certain about buying a property. However, they call for some caution, not to mention the need for a seller who won't look at them askance. Most of all, I suppose, you need a seller who's tired of waiting for a "regular" buyer to turn up on his/her doorstep.

But chance IS a fine thing, isn't it? And you never know, DO you?

With my best wishes now that ... sumer is icumin in (if I may repeat a title I used in June 2003 when I first began these newsletters!)