How Does Rent-to-Own Work in Alberta? [Myth-Busting & Red Flags]

Myth 2: "I can Rent-to-Own a Farm, Acreage, or Mobile Home"

We get this request a lot because Albertans love their space and the outdoors. However, the boring truth of banking and mortgages makes this much more difficult and risky for anyone considering getting into a rent-to-own program.

Lender guidelines for farms, acreages, and even mobile homes are vastly different from standard residential homes. They require larger down payments and have stricter underwriting. At Chilkoot Homes, we stick to freehold homes because they are the safest path to you getting a "yes" from the bank at the end of your RTO term.

"Freehold" means you own the land, which is different from condo or strata, which is a lease hold. We often tell our clients, owning the land is the most advantageous for any homeowner because land is a better store of value, which is oftentime why you see big fluctuations in condominimum pricing. 

Freehold Properties come in many forms that our clients can choose from, including single-family homes, semi-detached (duplexes), pre-fabricated/modular homes, or row houses. 

Myth 3: "It’s Cheaper than Regular Renting"

This is one we like to nip in the bud right off the bat. Just like owning a home is generally more expensive than renting, so to is rent-to-own. Why is owning more expensive than renting? It's because there are more expenses you are responsible for including, mortgage, taxes, insurance, maintenance and repairs. 

And with RTO, you are paying two things:

• The "Rent" Part: Your rent must cover, at minimum, our costs (mortgage principal and interest, taxes, insurance, and bank fees).
• The "To-Own" Part: Your monthly and/or annual contribution toward your future down payment.

A reputable provider will keep these payments entirely separate. You should receive a transparent payment schedule that lays out exactly what you are paying toward rent and exactly what you are contributing to your future down payment.

At the end of the day, rent-to-own is preparing you to be a homeowner. It’s a bridge solution to homeownership that provides structured support for you to get to a 10% minimum down payment goal. 

You’ll hear this a lot on Reddit or around the water cooler.

But, saying "rent-to-own is a scam" is like saying "Mortgages are a scam" because you pay more toward interest than principal in the first 5-10 years and the bank can foreclose on the property if you don't pay your mortgage. The reality is that both are financial tools designed to provide a solution. For some people, mortgages are not a vaible solution at this time in their life. This is where rent-to-own plays a role.

Does the industry have bad actors? Yes. Just like there are loan sharks in the mortgage lending world, or shady car dealerships, there are equity strippers in RTO. These are companies that set you up to fail so they can keep your deposit. However, a legitimate RTO is a professional bridge to homeownership.

The difference between a scam and a solution usually comes down to the contract details and the process of how they set you up for success. We'll give you a perfect example: Some providers include a gotcha clause in the contracts. It's where if you are one day late on a payment, you are considered to have broken the contract which could put your deposit at risk. 

While consistent on-time payments are critical (because a mortgage lender will check your payment history when you go to buy the home), a client-first provider like Chilkoot Homes understands that life happens. Our rent-to-own contract includes a reasonable grace period. We aren't looking for a technicality that sees you fail; we win when you successfully buy the home at the end of the RTO.

Myth 5: "It Solves an Income Problem"

RTO solves for credit issues or down payment gaps, but it does not solve for low income. The only case it could help is if you are a business owner who purposely takes a low salary as part of tax planning, but you can show business income that you can leverage.

If your household income doesn't support the purchase price of the home today, it is not likely to support it in three years. However, if your income is strong but you need time to pay down debt to reduce your debt-to-income ratio, RTO is a perfect solution.

We are honest with our clients from the start. If the math doesn't work for your income level, we won't set you up for a high likelihood of failure.

Myth 6: "I Won't Have a Landlord"

We aren't your financier in a legal sense, but we have purchased the property and you have an agreement that gives you the right to buy it within the 2-4 term of the RTO agreement.

This means there is a Lease Agreement in place, although, you have more freedom than a typical tenant. You want to paint the kitchen? Go for it. Have animals? This is their home too! Want to develop the basement? We can talk about it. Because we hold title and pay for home insurance, we still need to be informed of major changes so that there is never a lapse in insurance (an uninsured loss wouldn't be good for you or us).

While RTO provides way more flexibility—you still have a landlord technically speaking. Remember, RTO is a bridge that can help you get to mortgage qualification independently. But, even with a mortgage, you still have rules to abide by in the terms and conditions and penalties that will apply if you break the mortgage early. 

One thing we pride ourselves on at Chilkoot Homes is being an advocate for financial literacy and helping our clients get great at budgeting.  Because of this, we commit to fixed term lease agreements that provide rental stability for the entire term of the RTO.  This means you will consistently pay the same amount of rent, and you won't deal with rental increases year over year. 

Red Flags: How to Avoid a Shady Rent-to-Own Company

The RTO industry in Alberta isn't regulated like the mortgage industry, which means you have to do your own due diligence. Watch out for these:

• The One Day Late Gotcha Clause: Some contracts state that if you are a single day late on rent, your entire option deposit is voided. While being late is never good (it hurts your future mortgage qualification), life happens. A fair contract includes a grace period. If they are looking for a reason to cancel your contract, they aren't your partner.

• Ignoring the Basics: A reputable provider won't sign you up if the math or the law doesn't work. For example, if you haven’t cleared your three-month job probation, that is a bare minimum of stability to get started in a rent-to-own. The same applies to Permanent Residency. If you are here on a visa and don't have PR or Citizenship, you fall under the Foreign Buyer rules in Canada. A reputable company won't qualify you until you have PR, because you won't be able to easily and legally close on the home at the end of the term.

• No Mortgage Broker Involvement: If the company qualifies you themselves without sending you to a licensed mortgage broker for a deep dive into your credit and qualification criteria, run. You need a professional to map out your path to mortgage approval. And run even faster if they do not provide annual check ins with a mortgage broker to help keep you on track to success.  This is also true if they give you an "approved purchase price" before they've even sent you to a mortgage broker. A reputable provider will never start an RTO without a licensed mortgage broker’s involvement.

• Unnecessarily Large Deposits: If a provider sees you have $40,000 in savings and demands or pressures you to use all $40,000 for the initial deposit, that's a huge red flag. Any financially savvy person will tell you to take some of that money to put into an emergency savings and/or pay down high-interest debt. While we do have a minimum initial deposit requirement of 4% of the price of the home, or $17,500, and it does sometimes make sense to put in a higher amount to keep monthly costs down, if our clients have above and beyond what is required to successfully set up their rent-to-own, we will give them the advice that sets them up for success, not failure. 

• Lack of Transparency: Just like a mortgage, you are making a big commitment. If the provider doesn't transparently walk you through their contract terms, pros and cons, how they make money, and also doesn't separate out your rent and option deposit payments, this is a big red flag.

• No In-Person Support: If you they don't offer annual mortgage check-ins with a licensed broker, or provide regular in-person check-ins with a rent-to-own specialist, they are a high-volume provider, not a client-first partner.
  

Ready to Talk to Us about Rent-to-Own in Alberta?

We are a boutique team. We don’t want 100 clients; we want to help 5 or 6 clients a year who actually cross the finish line and become homeowners. We make sure all of our clients realize that rent-to-own requires commitment, discipline, and a clear-eyed understanding of exactly what it entails.

If you want to understand more about our process and how rent-to-own works in Alberta with Chilkoot Homes, click here or Get in touch with us today.