Resources
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Lexicon
RENT TO OWN
Also known as “lease with option to purchase”. A lease that gives the LESSEE (Tenant) the right to buy the property at an agreed-upon price under certain conditions. EXAMPLE: Mr. X leases a property with an option to purchase. He must pay $500.00 per month rent plus a lease option fee for an agreed period of time; after that he may buy the property (but is not forced to buy) for an amount set at the beginning of the lease.
LEASE OPTION CREDIT
While renting a home with the intent to own it, the Tenant will save up “Lease Option Credits” – a portion of their rent. This will make sure that the tenant will have saved enough credit which will be applied as a down payment This will ease the purchase of his future home. It is based on the property value and the length of the “lease with option to purchase”.
TENANT
One who is given possession of real estate for a fixed period or at will. In our system, the Tenant is the person who is renting a home with the intent to buy it within 3 to 5 years. Tenants will live in the home that they intend to buy, they are the Tenant/Buyer; meanwhile the buyer/investor owns it.
RENTAL COSTS
The Rental Costs include mortgage, property taxes, insurance and “Condo Fees” (if applicable) and lease option fee. These costs might increase during the course of the lease except for the tenant’s rent and option fee.
LEASE AGREEMENT
A contract in which, for payment called rent or lease, the one entitled to the possession of real property (LESSOR) transfer those rights to another (LESSEE) for a specific time period. In our “Rent-To-Own Program” the Tenant will sign a “Lease Agreement” outlining the terms and conditions of their lease; an option to purchase agreement will also be signed. Lease agreement can be for as long as the mutually agreed time frame, but in our case, the usual time is between 3 and 5 years.
OPTION TO PURCHASE
A contract that gives one the right (but not the obligation) to buy a property, within a certain time, for a specified amount, and subject to specified conditions. This “option to purchase” is valid for 3 to 5 years from date of possession (in our case), and will outline the expected purchase price of the home at that time. Should the Tenant/Buyer decides NOT to buy, they will forfeit their “Lease Option Fee” and “Lease Option Credits”. (I.E. WILL NOT BE RETURNED TO THE TENANT/BUYER, EVER)
LEASE OPTION DEPOSIT
Tenants/Buyers will pay the investor through us (APS) with a “Lease Option Fee” (that will be no less than $3000) prior to the possession of their home. This fee is non-refundable (see above Option To Purchase) and will be applied (with the Lease Option Credits) to the purchase price on the Option to Purchase, when the Tenant/Buyer wants to exercise this option.
MLS
Multiple Listing Service. An association of real estate brokers that agrees to share listings with one another. The listing broker and the selling broker share the commission on the sale of real estate. The MLS usually furnishes its members with a book containing all the listings or publishes them online, updating the book or online data frequently. Prospective buyers benefit from the ability to select from among many homes from any member broker. Like most, this is the website where the Tenant/Buyer and us use to search homes. It provides up to date information and accurate market value of homes in most neighborhood.
MARKET VALUE
The theoretical highest price a buyer, willing but not compelled to buy, would pay and the lowest price a seller, willing but not compelled to sell, would accept. Every home has a market value, a rough idea of what the home is worth in a competitive Real Estate market. This amount is usually determined by the sale price of comparable homes within the same neighborhood/area.
APPRECIATED MARKET VALUE
Since we need to have an “Option to Purchase Agreement” signed PRIOR to moving in (see above), our “Rent-To-Own Program” dictates the we must show a future value for a chosen property. This value is the approximate market value of the home in a time frame that is equal to the length of the lease agreement at the time of purchase. To do this, we use the Appreciated Market Value, which in the Ottawa area is today’s market value plus 6% first year, 4.5% in year 2, 4.5% in year 3, and 3.5% in each of years 4 and 5. This is not a standard appreciation and may be lower or higher in 3 to 5 years. We however use this number so everyone agrees to a purchase price prior to possession.
PRE QUALIFY
Each of our tenants and investors will need to pre-qualify with us. It MUST be performed prior to the registration process of our “Rent-To-Own Program”. This also make sure that Tenants/Buyers understand all the risks they are getting into. As well, we explain/show their financial obligation throughout the Term of the “Lease/Option Agreement”. Of course part of that pre-qualification is that the Buyer(s) has(ve) the necessary down payment and mortgage available to buy the property when required.
FINANCIAL SPECIALIST
Part of pre-qualification, our tenants will meet with a Financial Specialist. This person will go over their credit history. As well, the entire program will be explained to them and the “Specialist” will help them understand the financial risk they are getting into. The Financial Specialist will help them prepare to meet with a Mortgage Broker.
MORTGAGE BROKER
One who, for a fee, places loans with investors/banks, but does not service such loans. Both the investor and tenant will meet with a Mortgage Broker before registering for our program. The Buyer/Investor will get pre-approved for a mortgage to make sure they can immediately buy the home. When the Tenant/Buyer meet with the Broker, a projected financial picture will be shown to help understand the mortgage implication at the end of the lease option. All financial questions should be answered by then.
INVESTOR
The Investor is the person who will buy the home for our Tenant/Buyer. Their name will be on the Title of the house. They will also be responsible for the inspection of the house. Cost of Maintenance of the property (from a certain value) will be borne by the Investors, but this cost will eventually be recaptured from the Tenant/Buyer later. The Investor will also be responsible for keeping up with the Mortgage payments and paying the costs that are associated with the property in a timely manner. Of course, these costs/expenses are “pass through” and will eventually be paid by the Tenant/Buyer.
DOWN PAYMENT
The Investor and the Tenant/Buyer must come up with the necessary down payment before purchasing a home. Usually this amount is 10% to 20% of the purchase price of the home, but the more money they put down the less CMHC fees they will incur. As far as the Tenant/Buyer is concerned, this down payment will be the accumulated monthly lease options fee saved over the lease period plus the deposit paid at the beginning of the transaction (subject to conditions).
AMENDMENT TO AGREEMENT
Should the tenant and investor mutually decide to change a clause in the original “Lease Agreement” or “Option to Purchase”, an amendment must be completed. This is accomplished through either our Company, or a Real Estate lawyer.
Tools
Real Estate Calculator Ontario
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