rent to own

[JessHunt]

I`m in the process of completing a rent to own and have some concerns.

From all the reading and advice I understand that a rent to own is effected by 2 separate documents. This is also the advice the purchaser was given, so the purchaser, with their lawyer, has forwarded a purchase offer. Now, it seems, it is up to me to provide the standard lease agreement. My concerns are as follows:

If the rent is a separate amount, and a separate document, how is it tied to the purchase in the case of forfeit? We have agreed that the purchaser will put down a down payment of $20 000, and $15000 for the next 2 years, and the balance of 175, 500 at the end of the 3 years, but that they can pay down the remaining owing at any time. There is also a rent payment of $600/month. The purchase contract states that if they default on payments (no mention of rent) that the property reverts to vendor. But if the lease is separate how do I include the stipulation that if they default on rent they forfeit all payments, etc? Should that go into the lease to rent or the purchase contract?

This really doesn`t make sense to me, using 2 documents. it seems to me it leaves a lot to dispute in case of default.

Also, on the advice of a friend who has been burned with this, I intend to make annual inspections and take photos. The tenants are completing the renovations and I want to clarify that in the event that they default the renos must be left in the condition they bring them to for their own living. I`m giving 6 months of free rent at the beginning of the lease so that they can complete the house.

I`m confused.

 

[Dan_Eisenhauer]

Yes, you do use two separate contracts, with neither being tied to the other. Not seeing your Option contract, there should be a clause in it about default, and what triggers it, and what the consequences are. Check to see if regular and timely payment of rent is included. If it is not, added late or missed rental payments as a case for terminating the Option agreement.

The option is, for all intents and purposes, an agreement of sale, setting out some of the conditions of that sale. It will be used by the tenant to verify that they did indeed, pay over and above normal rent in order to pay the required down payment. If the tenant is paying market rent, the banks will not accept your saying, "$200 a month is to apply to the down payment."

 

[JessHunt]

Thanks, Dan - that exactly answers my query. The contract does not refer to rent at all. But the way you have described this sounds quite simple. Just add a clause stating that late or missed rental payments are a case for terminating the Option agreement. Sounds very straight forward. That was what I meant about them being tied - a default on the rental agreement terminates the purchase agreement. Your explanation clarifies the logic of the 2 contracts, thanks for that clarification. Jess

 

[BarryMcGuire]

Rent to own or more properly described as a lease with option to purchase is a very tricky strategy. Yes, the lease and option should be separate documents. One KEY issue is that if the deal goes bad and you try to cancel the deal and forfeit the option payments, the tenant always claims that they are not a tenant but a buyer who has been building equity. Judges often agree with them. I believe that it is critical to make sure your tenant buyer gets independent legal advice BEFORE you sign the deal clearly confirming that the tenant understands and agrees that he is not a buyer but a tenant with an option. In a fight, this may not save you but you will be a lot further ahead and better protected. This is a deceptively simple strategy, get solid legal advice before embarking on this adventure.

Cheers

Barry
\]

 

[JessHunt]

That clarifies the distinction. I`m afraid I pursued this before I understood that. The contract reads that if any purchase payment is missing or late that I must notify the purchaser, and that they have 30 days to pay the remaining balance. If they fail to do so they forfeit all payments made to date. That appears straight forward, can that be disputed?

When we verbally agreed to this the purchasers appeared to understand that the same applies to missing or late rent payments, but it does not appear in the purchase agreement. Now I must present the rental lease and I`m wondering which clauses belong in which document. I have compensted them for the unfinished state of the house. They are presently looking forward to living in it and owning it in 3 years, but people change. They have 6 months rent free and a large discount on the purchase price to finish the work. If things go badly and they decide to opt out I expect them to retain the house in its upgraded condition. Would that be part of the lease or the purchase contract as it affects both rent payments and purchase price?

It certainly does seem tricky. If it`s well done it should be the perfect fit for a house that cannot be used as collatoral for a mortgage, so I am certainly grateful for your advice which will increase likelihood of success. Thanks so much - Jess

 

[bearhunter007]

I feel based on my experience with both rent to own and WRAP mortgages that you are in a stronger position with a WRAP mortgage. The rent to own seems to open the court up to the idea that these are tenants that need protection. In other words, the tenants are unable to read the contract. The problem with rent to own is linking the two documents. If it says the equity building is a "deposit" then your chances of hanging onto the money is low.

A WRAP mortgage sets you up as the bank. This sets up the arrangement as clearly buyer and banker. The courts in my opinion have a better understanding of this business relationship compared to "rent to own".

In either case have a lawyer review all you paperwork and make sure your buyer`s provide you with a certificate of independent legal advice.

Good Luck!

Bearhunter007

 

[GarthChapman]

I would do this on an Agreement For Sale basis (also referred to as a Wrap). This method offers moer protection for you both, and really should be what is done when the downpayment is rather large as in this case.

I have an Agreement For Sale contract you could take to your lawyer for his review for possible use in the scenario. Email me at [email protected] if you would like it.

 

[JessHunt]

Thanks, Bear and Garth

I`ll do some more research, this sounds like another available option.

Jess

 

[WadeFenner]

Here is a little clarity....

In order to have a default clause your option needs to be tied to your lease...... but you don`t want your lease tied to your option.....

Yes you want two seperate documents. One showing the financial agreement and the other showing how a non-owner is occupying the property.

A lease to own is not, for all intent and purposes, an agreement for sale. With an Option to Purchase the tenant buyer has the option to purchase the property at a later date providing all the terms are met etc. In the case of default you can, providing you have written your agreement correctly, kick the tenant buyer out as a tenant who is not paying their rent on time.

With an Agreement for Sale the buyer/occupant has become the owner via the agreement. If they default you must under Canadian law foreclose them out of the agreement.

Have a very careful talk with a good lawyer before entering into either agreement as you may get your ass handed to you on a plate if you foul either up. Make sure your lease option doesn`t smell like an agreement for sale.

They may act alike and perhaps complete a similiar function but they are very different and run under different laws.


Cheers,


QUOTE (Dan_Eisenhauer @ Nov 6 2008, 11:58 PM) Yes, you do use two separate contracts, with neither being tied to the other. Not seeing your Option contract, there should be a clause in it about default, and what triggers it, and what the consequences are. Check to see if regular and timely payment of rent is included. If it is not, added late or missed rental payments as a case for terminating the Option agreement.

The option is, for all intents and purposes, an agreement of sale, setting out some of the conditions of that sale. It will be used by the tenant to verify that they did indeed, pay over and above normal rent in order to pay the required down payment. If the tenant is paying market rent, the banks will not accept your saying, "$200 a month is to apply to the down payment."

 

[WadeFenner]

Because you used the words "Purchase payment" a judge may in fact treat it as an Agreement for Sale, if it goes to court, because it smells like one...... with a Lease with an Option the tenant/buyer pays rent.






QUOTE (JessHunt @ Nov 7 2008, 09:06 AM) That clarifies the distinction. I`m afraid I pursued this before I understood that. The contract reads that if any purchase payment is missing or late that I must notify the purchaser, and that they have 30 days to pay the remaining balance. If they fail to do so they forfeit all payments made to date. That appears straight forward, can that be disputed?

When we verbally agreed to this the purchasers appeared to understand that the same applies to missing or late rent payments, but it does not appear in the purchase agreement. Now I must present the rental lease and I`m wondering which clauses belong in which document. I have compensted them for the unfinished state of the house. They are presently looking forward to living in it and owning it in 3 years, but people change. They have 6 months rent free and a large discount on the purchase price to finish the work. If things go badly and they decide to opt out I expect them to retain the house in its upgraded condition. Would that be part of the lease or the purchase contract as it affects both rent payments and purchase price?

It certainly does seem tricky. If it`s well done it should be the perfect fit for a house that cannot be used as collatoral for a mortgage, so I am certainly grateful for your advice which will increase likelihood of success. Thanks so much - Jess