What are the Risks With Rent to Own?
Rent to Own has been a program available to consumers since the 1950’s. There have been many success stories with Rent to Own but as with any program, there have been many stories of failure. So, what make a Rent to Own Program risky?
We believe it is not the “concept” of Rent to Own which create failures as we have experienced and heard more success stories than failures. As we have been a provider of Rent to Own solutions for over 15 years, we know the concept works when the program around the concept is properly structured. But what does that mean for you as a Consumer? It means that the Concept of Rent to Own is very safe , the difference is the structure of varying programs available in the market place. We believe the structure of the Program is the determining factor when it relates to the success of Rent to Own.
In today’s economic climate, it is becoming harder and harder for Consumers to get Mortgage Approval for Home Purchasing. Banks and Insurance providers have changed their guidelines making it harder for all consumers to get Mortgage Financing Approved. As a consumer, once you have been turned away by your Bank, you have very limited options to enter the Home Ownership market. Have you considered Rent to Own? Do you understand enough about Rent to Own to know it is and has been a GREAT Option for many Families? What is stopping you from turning to Rent to own as a way to become a New Home Owner? Lets talk about some of the “perceived” risks of Rent to Own, what they mean to you and let us help you better understand what we feel are the misconceptions around “risk” associated with Rent to Own.
The general risk with any Rent to Own Program is associated mostly with the Exit Strategy of the Rent to Own Program and not the Entry. This means any improperly structured Rent to Own program is likely doomed to fail from the beginning but Consumers are rarely aware of this until they get to the end of their Rent to Own term. It is when they try to arrange an Exit Mortgage to exercise the Option to Purchase that they realize everything they did under their Rent to Own program was for “not”. This has “nothing” to do with the concept of Rent to Own and more to do with improperly structured Rent to Own Programs.
So…What could make a Rent to Own Program risky?
The first thing we need to address are the 2 “main” types of Rent to Own Programs.
Property First Rent to Own…
This is where someone has Purchased a Property and is advertising for a Rent to Own Tenant. We understand the failure rate in these types of programs is somewhere in the 80-90% range. That is extremely high! These programs come to life when a Real Estate Investor buys a property with hopes of finding a tenant who will occupy the property for a predetermined time and buy it at the end. In many cases, the paperwork used to consumate these Rent to Own programs are ones bought off the Internet or provided as as result of attending a Real Estate Investment Seminar where the strategy of Rent to Own Investing is discussed. The Investors are motivated to earn the returns they learned about in the Seminar so they go buy a property to Rent to Own as fast as possible. The issue is, many of these programs are not structured to result in a successful ending. Why? Because the Investor offering the Property does not understand the Applicant’s financial situation and the support network is just not present to prepare the Tenant for an Exit Mortgage.
Tenant First Rent to Own…
This is where the Applicant is Pre-Approved and matched with an Investor to complete a Rent to Own Program. The Company offering the Rent to Own Program should have the structure in place to ensure the Tenant takes the necessary steps to get Mortgage Ready for the Future. Without this support Network and Structure, the Rent to Own Program is once again doomed for failure.
In the earler part if this article we referenced the fact that most Rent to Own tenants are consumers who went to their Bank for a Mortgage and were declined. The Consumer was declined for a reason. The reasons can vary from Applicant to Applicant but most are declined for the following:
– Because they are Self Employed and do not document enough income to prove they can make mortgage payments
– Because the Credit profile of the applicant is not acceptable to the bank
– Because the clients Down Payment is insufficient
– Because the clients Job Tenure is too short
– Because the client is a New Immigrant and does not have 35% Down for Mortgage Financing
The Exit Strategy for “any” Rent to Own Program is built around the issues that stop Consumers from obtaining Mortgage Financing today. During a properly structured program, the tenants want to create the right “Financial Profile” for when they go back to their Bank to apply for the Exit Mortgage in the future. To ensure Tenants are prepared for the Exit, the support Network needs to be in place to ensure things stay in track. Remember, the concept of Rent to Own is not to blame when Consumers fail to do the things required to Exit the Rent to Program in the future.
So..What else can make a Rent to Own Program Risky?
1) Poorly written Contracts – Given that almost 100% of Rent to Own Programs result in the Tenant applying for a Mortgage to buy the property, it is critical the paperwork used to finalize the Rent to Own Program have the details banks are looking for when assessing the Mortgage Application at the end. Banks and mortgage insurance companies, like CMHC, will NOT approve a Rent to Own Exit Mortgage unless the contracts are considered Compliant. This is why it is ideal to deal with a program ran by experts in the Financial/Mortgage Industry. These Program providers usually have their finger on the pulse of the Mortgage Industry. Non – Complaint Contracts are the Number One reason Rent to Own programs fail at the end.Consumers can not get approved for the Mortgage as the contracts signed are not acceptable to Banks or CMHC.
2) Insufficient Down Payment – The Tenant must exit with a Down Payment which matches the targeted Mortgage Product at the end. This is why some clients can secure rent to Own financing with 3% Down but some need 5% Down to start. It truly depends on the financial profile of the Consumer when they enter the Program. Some will need 5% down at the end and other may need as high as 15% Down. Again, it is all about the Exit Mortgage Strategy!! To get the proper strategy you really need to understand Bank and Insurer rules personally or deal with the Experts that understand these rules.
3) No Credit Profile/Credit Repair or Credit Management Program– There has never been a more misunderstood component of anyone’s financial profile. Let us tell it straight. “If you do not have a high enough Credit Score at the end, you will NOT qualify for a mortgage!”. Whether you have enough Down Payment, a good job and have made all your Rent to Own Payments on time, it will not matter if your Credit Profile is not what the Bank or an Mortgage Insurer is looking for,. Period. Any successful Rent to Own Program must have a properly Credit Repair/Management Program if the Tenant enters the program with damaged Credit. We quote damage to your Credit with Weight Gain. It is “easy” to gain weight but a long and slow process to to lose it. A Credit Rating can be easily damaged but it is a long process to get it back on track. Thinks about it…one missed payment ion a Credit Card reports to the Credit Bureau and negatively affects your Credit Score for 6 years!! Deal with a Program that specializes in addressing your Credit Profile.
4) Inflated Purchase Prices – Many Rent to Own Programs fail because the Purchase Price at the end is higher than the Market Value of the Home. We have seen many programs offering “Low Monthly Rent” in favor of a high Purchase Price at the end. The risk is if the Market does not appreciate enough or if there is market correction, there could be a problem securing the Mortgage at the end. We have seen some contracts where the Future Purchase Price is Today’s value plus 15% per year. This is VERY risky considering very few Markets in Canada have maintained these levels of Appreciation rates over an extended period. When the Purchase Price at he end exceeds the House Value, the tenant is expected to subside the purchase with a significant Down Payment contribution at the end, most tenant just have not prepared for this and as a result, the Rent to Own Program fails. Know your Real Estate Market or deal with experts who do.
5) No Legal Advice – We can only recommend that you take any contract to your lawyer for review and advice. Independent Legal Advice is mandatory with our Rent to Own Program. Speak to your Lawyer before signing anything!
RENT TO OWN WORKS and in a properly structured Program, the success rate is very high!!
Trust us…we have learned a lot in 15 year of business.
Our program has helped many families achieve the dream of Home Ownership. We are confident that it will work for you!