Recently, we’ve had a number of inquiries regarding rent-to-own contracts for buying real estate in Abbotsford, Chilliwack and Mission. Generally, we are approached by online clients looking to get our opinion on their situation. These “rent-to-own purchase contracts” usually come to tenants who are simply looking to rent a property. The offer comes from the same landlord who is trying to rent the home to them.
It seems to me that the mortgage broker industry is divided on this topic, but I take a firm stance. To understand my position, you need to understand the moving parts of a rent-to-own purchase contract.
Proponents say the benefits depend on the strategy and people involved, but many factors can go wrong when talking about the distant future of a rent-to-own completion. The detractors believe it impossible to give good advise to buyers/renters this far in the future, because there are no guarantees; just blind faith and a chance to lose thousands of dollars for the unknowning tenant dreaming to be a homeowner.
That being said, rent-to-own situations can benefit the buyers, sellers, and the mortgage brokers/realtors involved. There are two main parts of the rent-to-own contract: the lease to rent the property, and the ‘option’ component to buy the home at the end. The contract usually allows for the seller to collect and hold the future down payment monies from the buyer, as savings for the future mortgage down payment.
- Benefit for the buyer – Allows homeownership without the immediate need to have a down payment saved or qualify for a mortgage. The seller usually assists the buyer in the savings of the required down payment to buy the property. The extra time given to the buyer to save the down payment via the rent-to-own purchase contract also allows buyers who may not immediately qualify for a mortgage to repair issues preventing them from qualifying today (example: credit, income, job security and closing cost accumulation).
- Benefit for the seller – They simply benefit by attracting a more stable tenant during the rental process, due to the new tenants’ pride of future ownership. The seller avoids the ‘nuisance calls’ from typical tenants for minor repairs. It can allow the property to be pre-sold without the addition of real estate fees, in some cases. It gives protection to the seller in the event that the tenant/buyer reneges on their option to buy, by allowing the seller of the property to hold and keep the monies set aside for down payment–and this is where the danger lies as I see it.
- Benefit for the Mortgage Broker or Realtor – the benefit can be the opportunity for a broker to place a mortgage at the end of the ‘option to buy,’ as well as the mortgage at the beginning for the seller/owner. A realtor can also be paid for writing the contract up front OR upon completion, depending if a realtor is consulted.
The problem as I see it, is the fact that ultimately the buyer has no guarantees that they will ever qualify for a mortgage in the future. Without a mortgage, the buyer/tenant will not be able to claim their savings from the seller/landlord if they do not qualify to buy the home at the end.
In a typical rent-to-own, you may see a leased period of one to five years. Banks usually do not look further than 3 months in advance to pre-qualify clients. Buyers in these scenarios are generally speculating that their situation that ultimately causes them to not qualify for a mortgage, will some how correct itself in the meantime. As a mortgage broker, I have counseled many people to help them fix issues in the past, but adding an ‘option’ contract to buy a home does not help these situations. Just one miscalculation by the buyer, and the seller could get to keep your hard earned savings as their benefit for granting you the ‘option’ to buy.
- From what I have seen in most rent-to-own contracts, deals are written by non-finance people. Unlike myself, they cannot develop a true exit strategy for the tenant to qualify for their mortgage, and claim their hard earned savings back from the seller.
- Non-compliant contracts are being used in some situations. American style rent-to-own contracts are not legal in Canada. This can put the seller at risk of a lawsuit. Banks in most cases won’t honor these contracts when it comes time to get ‘take out’ financing on the ‘option’ to buy. The seller evicts the occupants and keeps 100% of the down payment and any option credits. This is a predatory action and will result in lawsuits, most likely.
- Mortgage qualification repair. Clients unable to qualify for mortgages usually drive these types of purchase contracts, but in most cases once signed, the clients do nothing to repair their credit issues. In these cases, someone probably was just grabbing a ‘consulting fee’ up front and never had intention to help the purchasers.
- I’ve heard of rent-to-own contracts that use part of the increase in the home’s value to establish part of the down payment. This is also a scam, as no bank will use home equity growth as a reasonable down payment method. Monies must be accounted for and set aside. In these cases, the seller would again evict the tenant and keep all the money.
By Referral Mortgage Consultants*
“Click, Call, Chat – Award Winning Brokers”
1 – 32540 Logan Ave
Mission BCV2V 6G3
360-3033 Immel St
8387 Young Rd
Dave 604 897 2741 Jordi 604 615 1312
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