Option


The idea behind a Rent to Own program, is that you, the tenant, are purchasing an option to buy a house, which you have picked out, at a specific price at a predetermined time in the future. For this right, you are paying us an option fee which will be put towards the property purchase when the option is exercised. The cost of this option is 4% of the house price. This equates to a $16,000 option fee for a house which costs $400,000 at the time the option is purchased. It should be noted that this option fee is non-refundable when the option is not exercised. In simple words, this means that if you walk away from the deal, your option fee will not be returned to you. This is why it is critically important to ensure that you are 100% for purchasing this property.

Do you have the money required to purchase an option on the house you are thinking about buying?

Graph showing option price vs home price

Monthly Rent Payment

The monthly rent, which will be on your lease, will be the total of your rent payment plus option credit. Thus, each month you will make two payments. One payment will cover your rent on the house which is typical of a standard rental agreement. The second payment will be deposited into a different bank account. This option credit, which will be credited to you upon exercising the option, is deposited into a second account to prove to the bank that the money came from you slowly over time. It is critical that you document all of your payments because when it comes time to exercise your option and get a mortgage, the mortgage company will want to see that this money came from you. The accumulation of the option credit over time will bring your total payment up from 4% to approximately 7%. While the minimum down payment required for a mortgage is 5%, CMHC and the government generally have been increasing the requirements to obtain a mortgage. Also, you will have closing costs when it is time to transfer ownership of the property. Because of this, it is required that more than 5% be saved over the two-year term.

It should be noted that these extra payments will be credited to you provided every month your rent payments are made on time. In the case that you do not exercise your option, this money minus liquidated damages will be returned to you. Liquidateable damages include but are not limited to: realtor fees, lawyer fees, cleaning costs, repair costs, $100/month to optionor for time invested, loss in home value and lost income. To see a number of different examples on how much money you will get back when you do not exercise your option please see the bottom of this page.

Credit Score

In order to qualify for a mortgage in Canada, you need to have a credit score preferably above 680. One of the aspects of this program is to improve your credit score. Your credit score may be one of the reasons why you did not qualify for a mortgage. You will need to pull your own credit score at a cost of $23.95. We use Equifax, which is a company which monitors people’s credit score, to provide us with your credit score. Get your Equifax credit score here. When you pull your own credit score, this does not count as a hit toward your credit. Generally the more times people look at your credit the lower your credit score will be. For our program, you require a credit score greater than 520 preferably greater than 550. If you are new to the country, you may not have a credit score simply because you have not been in the country long enough. If you are new to Canada, we will work with you to obtain a credit score provided you are accepted into the program.

After pulling your credit score, do you have a credit score greater than 520?

Now that you know your credit score and how much an option costs,

Do you need this program?

The first question you need to ask yourself is “Why do I need to use this program?”. If you have answered yes to all of the above questions and have a credit score above around 660 then there is a high probability that a good mortgage broker can work with you and get you a mortgage to purchase a house. If you have already gone to see a mortgage broker and they indicated to you that you could not qualify for a mortgage then you likely need our program or you could choose to wait before purchasing a home. However, if you have not already seen a mortgage broker we would strongly advise you to go and talk to a mortgage broker and determine if you can purchase a home on your own. For your sake, as part of our application process, we will ensure that you discuss your situation with a mortgage broker before accepting you into the program. You can check out these mortgage brokers in Airdrie and Calgary.

Alternately you should be sure that you really want to own a home. If you are unclear about this please review our rent or buy page.

What happens if I decide I don’t want to purchase the home?

When you choose not to exercise your option and purchase the house we will either sell it or find another person interested in a Rent to Own program. As there are more people interested in just buying a house instead of a Rent to Own program, the likelihood is that we will sell the property, using the realtor, to another buyer.

The three scenarios described below will give you an idea of what you can expect in the unlikely event you choose not to exercise your option to purchase the house.

In all of the cases below, it is assumed that the home costs $375,000 and the optionee paid $15,000 for an option. Monthly rent is $2,600 per month which consists of $2100 rent payment and $500 per month option credit. Real estate fees to sell the house cost $8,000. From the option contract, the future price of the home is valued at $394,000. These values are estimates only and will vary depending on the situation.

Scenario 1 (best case)

Three months before the lease expires, the tenant decides they do not want to purchase the home and tells the landlord/owner. The tenant continues to pay rent on time until another tenant, who wants to use a Rent to Own program to purchase the house, signs an option agreement and takes over the lease. The terms of this new option agreement are similar to the first option agreement. The tenant leaves the house in move in ready shape and steam cleans the rugs, cleans the house prior to departure and does not leave anything behind.

  • Option fee – $15,000 (non-refundable)
  • Option credits – 24 months @ 500$ = $12,000
  • Lawyer fees to sign new option agreement – $1,250
  • Fee to optionor for efforts – 24 months @ $100/month = $2,400
  • Home sells for – $397,000 (slightly above the price stated in the option contract)
  • Miscellaneous costs – $500
  • Appraisal – $500
  • Refunded to the tenant – $10,350 (38% of option fee and option credits)

Scenario 2 (average case)

Three months before the lease expires, the tenant decides they do not want to purchase the home and tells the landlord/owner. The tenant continues to pay rent on time until the house is sold, at a slightly higher price than expected, to a new owner. The tenant leaves the house in good shape and steam cleans the rugs, cleans the house prior to departure and does not leave anything behind.

  • Option fee – $15,000 (non-refundable)
  • Option credits – 24 months @ 500$ = $12,000
  • Lawyer fees to sell the home – $1,250
  • Cost to sell the home using discount Realtor- $8,000
  • Home sells for – $397,000 (slightly above the price stated in the option contract)
  • Miscellaneous costs – $500
  • Fee to optionor for efforts – 24 months @ $100/month = $2,400
  • Refunded to the tenant – $2,850 (10.5% of option fee and option credits)

 

Scenario 3 (worst case)

Three months before the lease expires, the tenant decides they do not want to purchase the home and tells the landlord/owner. The tenant continues to pay rent on time until the house is sold, at a slightly lower price than expected, to a new owner. The tenant leaves the house in good shape and steam cleans the rugs, cleans the house prior to departure and does not leave anything behind.

  • Option fee – $15,000 (non-refundable)
  • Option credits – 24 months @ 500$ = $12,000
  • Lawyer fees to sell the home – $1,250
  • Cost to sell the home using a discount Realtor- $8,000
  • Home sells for – $392,000 (lower than expected)
  • Miscellaneous costs – $500
  • Fee to optionor for efforts – 24 months @ $100/month = $2,400
  • Refunded to the tenant – $0 (0% of option fee and option credits)