Mortgage (Photo credit: 401K)
Rent-to-Own is a popular concept these days. They are popping up all over the place due to a number of gurus like Ron LeGrande. I get a lot of questions about this and it’s a complicated subject so I thought I’d go over some key points to clarify things for those who might be considering entering into a contract like this.
Firstly, Rent-to-Own can be a good thing or it can be bad thing. You can’t paint them all with one brush. We are dealing with contract law not statute law so a deal can be written in any way you want. Now this is good for you natural negotiators out there because you will know that every detail of the contract is negotiable. Ideally it is an expensive way to finance real estate in the medium term that assumes some risk; therefore, it’s not really suitable for people who can barely afford to own a home. It is a better option if you have lots of money or income but bad credit or are recently self employed and can’t qualify for a mortgage.
In the grand scheme of real estate finance there are tiers of lending: At the top is your A lending which is your major banks and mortgage companies. You have access to the best rates and terms but you need stable employment, good credit, and a down payment. Next is your B lending which can also be called equity lending as they require more down payment (or equity in the case of a refinance) usually in the realm of 15-35% but they loosen the credit requirements and sometimes don’t require proof of income. This is used a lot by people who are self employed and have a difficult time documenting their income and people who have equity but bad credit. Rates will be higher but reasonable. Next you have C lending which is your private lenders and Mortgage Investment Corporations (MICs). These are mostly used for second and third mortgages which have significantly higher rates and also high equity requirements but they can also do first mortgages. For the most part they don’t care about the person they’re lending to they care about the property they’re lending on. There needs to be enough equity to cover the costs associated with foreclosing and selling the property in the case of default and the rate of return makes up for the times they have to do this to get their money back.
And fourth on the list is Rent-to-Owns. I suppose we could call this D lending. It is essentially a way for the seller (or investor) to finance the property for you for 1-5 years while retaining title to the property. Because there are so many ways to write this type of deal anyone considering it should find their own lawyer who deals with rent-to-owns to advise them and look over all the contracts before you sign them. Working with a mortgage professional is also a good idea as there will likely be a credit improvement component to this as well that will be vitally important.
Rent-to-Own is the common term for a lease option or an agreement for sale. A lease option is just what it sounds like: a lease agreement and an option to buy. An agreement for sale is a purchase contract with possession before closing and the details of the possession agreement appended. The biggest difference is a Lease Option is an option to buy at the end of the term and you are afforded the rights of a tenant. An Agreement for Sale is an obligation to buy at the end of the term and you are afforded the rights of a purchaser. Both have benefits and drawbacks that you'll need to talk to your lawyer about.
That brings us to the two most important things to do if you're considering a rent-to-own: Get a lawyer who knows about rent-to-own strategies. Don't just pick a lawyer out of the book but take the time to find one that frequently deals with these types of contracts. You need qualified legal advise before entering a contract like this. Secondly, you have to finance it when the term is up and unless you're going to wind up with a 20% down payment then you'll need mortgage insurance. CMHC requires that the contract include a clause that requires the seller to refund a part of the "option consideration" (the amount that's going toward the purchase) if the buyer is not able to complete the purchase. They also require market rent to be charged; you can't rent it out for $10 per month. There is lots of wiggle room in the interpretation of these rules but they need to be considered.
If you're looking at a rent-to-own or interested in finding one please contact me at (780) 996-2655. I would be happy to look at contracts, advise you, and even help you negotiate a deal for yourself.
That brings us to the two most important things to do if you're considering a rent-to-own: Get a lawyer who knows about rent-to-own strategies. Don't just pick a lawyer out of the book but take the time to find one that frequently deals with these types of contracts. You need qualified legal advise before entering a contract like this. Secondly, you have to finance it when the term is up and unless you're going to wind up with a 20% down payment then you'll need mortgage insurance. CMHC requires that the contract include a clause that requires the seller to refund a part of the "option consideration" (the amount that's going toward the purchase) if the buyer is not able to complete the purchase. They also require market rent to be charged; you can't rent it out for $10 per month. There is lots of wiggle room in the interpretation of these rules but they need to be considered.
If you're looking at a rent-to-own or interested in finding one please contact me at (780) 996-2655. I would be happy to look at contracts, advise you, and even help you negotiate a deal for yourself.
