Agreement for Sale

Regardless of the standard of living in Calgary, consumers have had to contend with two recently emerging factors that could jeopardize their chances of owning a home.

For openers, rising housing prices have been a consideration for a few years, although the average price of a family home in Calgary at the beginning of 2013 was $496,579 – slightly lower than its Toronto equivalent at $558,345 and less than half the price of a detached bungalow in Vancouver.

The other factor concerns the federal regulation of mortgage lending standards, which not only shortened the amortization period by five years to 25, it also reduced the equity level a consumer can borrow against a home’s value from 85 to 80 per cent. The increase in monthly mortgage payments and a shorter ceiling on borrowing limits can potentially shut out a significant number of potential home buyers.

One alternative that’s been receiving attention of late is the idea of rent-to-own, which enables residents to contribute an amount of monthly rent for a predetermined period (normally three years) with an option to eventually buy the home.

For sellers trying to unload a dwelling, exercising the rent-to-own option spells more potential customers interested in taking occupancy. And in the case of a sluggish economy, those trying to unload their homes face a new market of potential tenants to help contend with any decline in home values while keeping pace with payments. Charging fair market rent countervails the economic stress of a monthly mortgage on the place as well. Sellers are also off the hook for renovations costs, since a rent-to-own agreement not only makes tenants responsible for maintenance, including footing the bill ill for their own repairs – even during the initial rent-to-own agreement period.

If at the end of the initial period, tenants decide not to buy, sellers still have the option to list the home. The big payoff in such a case is the higher return a seller can receive on a house appreciating over time and the curb appeal of a dwelling if a tenant had repaired and renovated the premises.

For buyers overwhelmed by housing prices and tighter mortgage rules, going the rent-to-own route is an opportunity to bypass the amount of cash needed for a down payment. The option is welcome news for families with bad credit history, job losses, or those who spent much of their savings migrating to the city. Avoiding the down payment in a rent-to-own allows those buyers to fix their credit history and grow their savings. Opting for rent-to-own is also easier than qualifying for a mortgage loan.

But buyers should also take into consideration that entering into a rent-to-own agreement includes putting down cash to cover the upfront option fee, usually about two per cent of the house’s value. That money goes towards the down payment of the house should the renter decide to buy the place upon conclusion of the rent-to-own period. If the tenant fails to cover rent each month or terminates the agreement before the period ends, that fee goes to the homeowner.

Still, despite these requirements, the risks surrounding a rent-to-own alternative are rather small, especially if low income is an issue. A local Realtor will also be willing to discuss additional amenities and disadvantages.