 Mike Toporowsky AMP
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| Rent To Owns |
Tuesday, June 1, 2010 |
Rent To Own...what you should know.
I had the opportunity to help develop a Rent To Own program for a home builder in Edmonton. The home builder saw them as a unique way of selling their homes in a tough market. Most of the potential buyers were trying to find a way off the rental treadmill. One came to me and said I don't want to rent anymore, because it is the equivalent of paying 100% interest. You can pay a landlord for years and never see any benefit of home ownership or value in real estate. Some just wanted a way to protect themselves from rent increases.
Rent to Own is not the way I would go personally, because there are better ways of getting off of the rental treadmill. A rent to own investor I met had amassed quite a number of rent to own homes that were currently under 'option to purchase' contracts. He was not interested in sinking anymore of his own money into additional properties, because he found that it was easier to help others administer their properties for a fee. He says he started out by purchasing homes for Rent To Own buyers and 85% of them failed to fulfill the contract. That was the number he gave me...85% failure. He says he simply turns around and offers the same property to somebody else as a Rent to Own and the cycle starts again.
Why is there such a failure rate for the rent to own tenant/future owners? It all boils down to planning and discipline. There are the few cases where uncontrollable circumstances cause a failure, but for the majority it was old habits that caused the failure.
Why were they renting initially? Just out of the nest, poor credit (lack of credit), seasonal employment, bankruptcy, not long enough on the job, divorce, poor planning, low income earnings, no contingency fund for emergencies, expensive vices (uncontrolled spending, gambling, smoking, drugs, drinking, etc.). Many of the younger applicants were recently living at home and wanted all the luxuries of their parent's home...now!
There are different types of rent to own or lease to own plans. If you are intent on getting into a rent to own, you should know what your plan should be to pay out the landlord when the contract is up. Canada Mortgage and Housing Corporation requires a rent-to-own contract to have 2 specific items. A portion of the rent going toward a future down payment (the portion stated will be the additional rent amount above normal market rent for a similar unit) and an agree percentage of the accumulated down payment to be returned to the tenant if the rent-to-own agreement fails. That way the tenant is not totally in jeopardy of loosing all down payment money. CMHC does not stipulate the exact percentage, so it should be negotiated into the Rent-to-Own package.
I found that many folks who were inquiring about the program were shocked at the costs. They simply realized that they would have to be patient and plan for their purchase. This definitely would have made sense if you were buying on a rent to own plan when the market was at it's peak. The landlord will factor in a future purchase price by adding anywhere from 3-9% increase in the home's future value for each year you rent from him. The same customers from 3 years ago could have repaired their credit and saved up a down payment and bought the same home today for 10-15% less than at market's peak in 2007.
Yes, rent-to-own allows you a couple of years to re-establish your credit, but if you have not dealt with why your credit was bad in the first place, don't expect things to change in 2-3 years. Rent-to-own is a quick fix for the "i want it now" convenience of owning a home. Convenience comes with a price.
The solution...plan to be a homeowner and you will reach your goal. Plan a budget to save for your down payment. Work with a mortgage specialist to find out what you will need to qualify for a mortgage and make sure you follow the plan. Listen to suggestions on how to improve your Beacon score. If you have a setback, just stay with the plan, the best you can. In the meantime, use your planning time to research the perfect home for your needs. Check out neighbourhoods and talk to the folks who live there. Find out how the school bus or transit system works in that area. Talk to realtors to see what home prices are doing. See where they would recommend and why. Set a price range on your purchase, with help from your mortgage broker.
Feel free to comment, if you have any questions.
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posted by MIke Toporowsky at 8:14 am |
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Mike Toporowsky AMP
Real Mortgage Solutions
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