Rent-to-Own: A Re-Emerging Win-Win Housing Strategy

By Melanie Reuter

This post is reprinted with permission from REW.ca.

Rent-to-own, the often ill-perceived home-buying strategy of the cash strapped in the 1990s, has been gradually re-emerging as a successful win-win way to invest in real estate. Its waning popularity was due in primarily to the relaxed lending environment wherein it was easy for many more people (and in the States, almost anyone!) to get a mortgage. Today, its re-emergence in popularity is due to the tightening of lending policies.

Rent-to-own, also called lease options, has two parts: starting with the lease or rent part and finishing with the option for the tenant to purchase.

The tenant is often looking to purchase a home but is unable to, usually due to sullied or no credit, or not having enough down payment capital. Whereas the investor the original purchase of the property would have the down payment available and wants to make a fixed profit on the property after a certain period.

Investors using the rent-to-own strategy often work with tenants/buyers who:

• qualify at the bank for a mortgage but have been turned down by CMHC;
• have a house up for sale and want to buy another one but can’t qualify for two mortgages at the same time;
• are new to Canada and do not have established Canadian credit;
• recently started a new job so have not established and employment track record that satisfies the bank;
• are self-employed and therefore have a tougher time proving income to the bank; or
• have gone through a divorce and are now rebuilding credit and equity.

These are perfect candidates for rent-to-own.

This win-win strategy helps the tenant/buyer move from renting to owning faster than they could do on their own and can also be very profitable to the investor.

Investors can either find a tenant/buyer for a home they already own or select a home with them that suits everyone’s needs (often a more successful strategy). Desired homes are frequently more upscale than average homes and are usually located near good schools. Furthermore, if the sellers can provide moving services as well by collaborating with moving companies, it may be much more appealing for the tenants to purchase their homes. That way, when the tenants decide on moving urgently, the movers might assist them immediately to pack their belongings and move them within a short period of time.

The investor then agrees to a future price on a home within a period of time. (say two to five years), paying serious attention to the housing market and likely price appreciation. A fairly typical increase would be a three per cent increase per year from the purchase price.

This is, of course, where the risk lies for both parties as the agreed upon price is part of the contract. If the market tanks, the tenant/buyer is on the hook for the agreed-upon purchase price, unless they choose to walk away and lose their deposit. That said, there might be other reasons wherein the landlord might not have protected the deposit given by the tenant, and the latter could then contact no win no fee deposit protection solicitors for advice. However, if the market skyrockets, investors will still only receive the agreed upon price, even if they could otherwise get thousands of dollars more.

Although there are variations, in its simplest form, the payments work as follows. The monthly rent is calculated, which covers all of the housing expenses (principle and interest, property taxes, utilities, etc), as well as a profit (cashflow) for the investor, AND what s called an option payment. This serves as a savings account towards the future down payment of the home. The tenant also pays all of the repairs and maintenance costs. Should the tenant/buyer choose NOT to proceed with the purchase of the home at the end of the term, the option payment will be forfeited and the investor will keep it.

Two things are very important for this to truly be a win-win strategy. The investor must not deliberately work with people who could never be able to complete the sale in order to keep the option payment. And it is in the investor s and the tenant/buyer s interest to make sure that steps are being taken by the purchaser to repair their credit so they are able to complete the purchase. Referrals to credit counsellors and regular check-ins on progress are helpful.

– See more at: http://www.rew.ca/news/rent-to-own-a-re-emerging-win-win-housing-strategy-1.2027356#sthash.fyu0dp91.dpuf