A 'people first and property second' approach is essential, says expert
Among the options that mortgage brokers recommend to clients who can’t qualify through a bank, it’s fair to say that rent-to-own offerings rarely feature at the top of the list.
That niche arrangement, which usually caters to borrowers who aren’t currently able to afford the money down that’s required for a mortgage or have blemished credit, lets would-be buyers make payments on the home they’re renting that go toward both rental costs and a future down payment on that property.
It’s aimed at navigating borrowers through a timeframe, usually between two and four years, that will allow them to repair credit and put together the funds required to eventually purchase. Unlike a standard rental agreement, monthly payments are made up of a bundle that includes carrying costs (property taxes, insurance, and mortgage) as well as a down payment instalment.
Part of the reason that many prospective buyers have traditionally been reluctant to consider entering into a rent-to-own agreement is that in the past, they were often viewed as skewed to the landlord’s needs, according to Rachel Oliver (pictured top), a leading authority on the subject.
That meant the owner of the property might charge a premium to the rent-to-own tenant – without having a clear or realistic understanding of what it will take for that individual to ultimately afford the down payment at end of term.
“At the end of the day, rent-to-own is all about achieving a goal of qualifying for a mortgage on a particular property,” she told Canadian Mortgage Professional. “And if you don’t approach the process with that end goal in mind, things fall apart very quickly.
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“So that’s the point when people were kind of doing a one-on-one arrangement. There were a lot of topsy-turvy kind of agreements, things written on the back of a paper napkin, he-says-she-says scenarios, and really poor success rates.”
Still, Oliver emphasized that rent-to-own arrangements can represent a good option for Canadians when working with a company whose interests firmly align with their own – and that works with a clear and consistent process. She serves as managing partner at Clover Properties, which offers rent-to-own options under what Oliver described as a “people first and property second” mantra.
That’s tailored toward Canadians who have been turned away by a lender but don’t want to return to renting while they work out their credit situation and how to come up with the funds required for a down payment on another property.
“Let’s face it, life happens and it’s very difficult to manage all of those moving parts on your own,” Oliver said. “You need some guidance, you need some help, and our program creates a framework, structure and accountability process [so] that once [clients] move into that rent-to-own home, they’ll get that during the rent-to-own term.”
Those programs also designate a budget based on the stress test in Canada, she added, to ensure that borrowers meet the lending criteria in the marketplace, before they find a suitable property before receiving projections on what their monthly commitment and down payment instalments will look like.
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If the client agrees to the numbers, a private investor steps in to purchase the home. “They have a 20% down payment and they want to help the [renting] family,” Oliver said. “Really, this process is families helping families with our team in the middle, making sure that nobody oversteps boundaries, and everyone is getting an arrangement that is going to be equitable.”
Rent-to-own customers know exactly what price they’re to eventually buy the property for up front, Oliver said, with all conditions pre-negotiated prior to the term beginning. There’s also no penalty to exit early and purchase ahead of schedule – unless the investor has, for instance, a variable-rate mortgage with a differential penalty, which is then transferred on to the rent-to-owner.
Of course, there are plenty of risks associated with rent-to-own products; RateHub emphasizes the importance of a solid agreement with legal protection and clear understanding of contract stipulations among both parties.
Working with a credible company in the space is essential, too, said Oliver, who encouraged mortgage brokers to research those options in more detail and “take the time to understand how rent-to-own can help certain clients – especially in a market where so many people can’t even afford a private mortgage.”
