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  • Writer's pictureNeil Joseph

Pros and Cons: Choosing Between New Construction Home and Rent-to-Own

Updated: Mar 18


Buy a New Construction property or Rent to Own?

In the realm of real estate, decisions often come with a blend of excitement and uncertainty and choosing between these two options is no different.  One reason why many people choose to buy New Construction home is not because they are looking for a fresh new property.  While that is an upside, one of the primary reasons for looking at this option is because there is some factor preventing the buyers from making an immediate purchase in the resale market.  That could be something to do with their downpayment, credit, income stability or some other ‘temporary’ challenge.   If that happens to be one of your reasons, then I would suggest considering a Rent to Own option as well before making the plunge.  This is not an often-discussed option and I attribute that to lack of awareness and maybe because it’s not in the self-interest of the realtor you are working with.

 

So, lets dig further into these options and consider their distinct advantages and considerations, to help you make an informed decision.

 

New Construction Home from a Builder:

Pros:

  1. Customization: One of the most significant advantages of buying a new construction home is the ability to customize it (to some extent) according to your preferences. From layout to finishes, you have the freedom to choose from available layouts and personalize your space to reflect your lifestyle and taste.

  2. Warranty: New construction homes often come with Tarion warranties that cover structural defects and major systems, providing peace of mind for homeowners. This protection can save you from unexpected expenses in the initial years of homeownership.

  3. Energy Efficiency: Modern construction techniques prioritize energy efficiency, resulting in lower utility bills and a reduced environmental footprint. New homes are typically equipped with energy-efficient appliances and insulation, contributing to long-term savings.

  4. Modern Amenities: Builders often incorporate contemporary amenities and design trends into new construction homes, offering features such as open floor plans, smart home technology, and updated appliances.

Cons:

  1. Higher Initial Cost: Purchasing a new construction home typically comes with a higher upfront cost compared to existing homes or rent-to-own arrangements. Most often the new projects are offered at a higher price compared to resale of existing properties in the same neighborhood.

  2. Construction Delays: Construction timelines are susceptible to delays due to factors like weather, material shortages, or regulatory issues. Buyers should be prepared for potential setbacks that could postpone the completion and move-in date of their new home.

  3. Occupancy fees: Very often with Condominium projects, the buyers get to occupy the units before completion of the entire building, registration of the property with the city or purchase closing.  The occupancy fees charged by the builders tend to be higher than comparable rents and there is no paydown of mortgage balance during the ‘occupancy’ period.  The period of occupancy can also vary depending on which floor the unit is located on and generally varies drastically from one project to another.  Having to pay the occupancy fee while also covering the rent on your existing place (if there is an overlap) can also add to the higher expenses.

  4. Uncertainty regarding Financing Costs: There is usually years of waiting time between securing a purchase agreement and the closing of the purchase.  Financing options are generally crystalized only a couple of months before the closing, and this creates a lot of uncertainty for buyers.  Their employment /income profile, outlook for real estate prices, as well as the generally lending environment could have changed over time and can make it difficult for buyers to get the mortgage that they might have been pre-approved for. Further, if the real estate outlook has changed then the appraisal can come lower than the purchase price, thereby potentially increasing the downpayment required to fund the purchase.

 

Rent-to-Own Home:

Pros:

  1. Purchase Price Lock-In: Most rent-to-own contracts include provisions that allow tenants to lock in a purchase price for the property, protecting them from future market fluctuations. This is a good ‘option’ to have especially in regions experiencing rapid appreciation in home values.  Also, if the prices reduce for some reason, then the ‘option’ holders can opt to not close the purchase (unlike buyers of new construction homes) but instead look at buying from the resale market.

  2. Flexible Financing: Rent-to-own agreements offer flexibility, allowing tenants to gradually build equity or save up for downpayment in the property while renting. This can be advantageous for individuals who may not currently qualify for traditional mortgage financing due to credit challenges or insufficient down payment funds.

  3. Test-Drive the Home: Rent-to-own arrangements provide tenants with the opportunity to live in the property before committing to purchase it. This "trial period" allows renters to assess the specific property, neighborhood, amenities, and overall suitability of the home before fully committing to the purchase.

  4. Negotiating power: The ‘seller’ usually involved in a rent-to-own arrangement is a ‘small’ property owner who wants the reliability of selling price and is willing to forego above average price increase in exchange for that flexibility.  Unlike a deep pocketed builder, the small property owner would be more open to equitable negotiations in arriving at the terms of a rent-to-own arrangement and thus a more level playing ground is available to the parties involved.

 

Cons:

  1. Limited Control Over Property: While renters may have the option to purchase the property at the end of the lease term, they typically have less control over customization and renovations during the rental period. This lack of autonomy could be a drawback for individuals who value the ability to personalize their living space.

  2. Higher Monthly Payments: Rent-to-own agreements often involve higher monthly payments compared to traditional rental properties, as a portion of the rent is allocated towards building equity in the home or downpayment for the purchase. Tenants should carefully assess their budget to ensure they can afford the monthly payments throughout the lease term.

  3. Risk of Forfeiture: If tenants fail to exercise their option to purchase the property at the end of the lease term or default on rent payments, they may forfeit the option fee and possibly some equity accumulated during the rental period. This risk underscores the importance of understanding the terms and obligations outlined in the agreement.

  4. Uncertainty regarding financing costs:  Risks like that outlined for ‘new construction’ remains with this option.  However, there could be a higher potential for negotiation with a ‘small’ property owner to work out an alternate arrangement or this scenario could have been potentially addressed in the original rent-to-own agreement. 

 

Conclusion:

In the debate between purchasing a new construction home from a builder or opting for a rent-to-own arrangement, there is no one-size-fits-all answer. Each option presents unique advantages and considerations, depending on your financial situation, lifestyle preferences, and long-term goals.

 

If you prioritize customization, long-term stability, and energy efficiency, a new construction home may be the ideal choice for you. Conversely, if you seek flexibility, the opportunity to build equity over time, and the ability to test-drive the property before committing, a rent-to-own arrangement could align better with your needs.

 

Ultimately, it's essential to conduct thorough research, consult with financing and real estate professionals, get legal counsel, and carefully evaluate your priorities to determine which path best suits your circumstances. By weighing the pros and cons of each option, you can make an informed decision that sets you on the path to homeownership with confidence.

 

Irrespective of the choice, it’s critical that the buyer has a well thought out plan to address the ‘original challenge’ which prevented him or her from buying from the resale market.

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