Broker: Rent to own benefits all parties involved

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Rent to own properties benefit clients, investors and brokers, according to one leading player, who lays out the elements of a R2O strategy for those looking to add this lucrative business to their repertoire.

“The two components to the deal are the ‘lease’ or occupancy companent and the ‘option’ component,” Bruce Smith of Centum Future Mortgage Group wrote in the latest issue of CMP. “We will explore the benefits of such an agreement, some of the key elements that make up a rent-to-own agreement and what pitfalls as mortgage brokers you should be trained to observe and prevent.”

Benefits of a Rent to Own

For the client – Allows homeownership without the immediate need to qualify for a mortgage. A typical rent to own candidate lacks the income, credit or full down payment to qualify for a traditional home purchase. They simply rent the home until such time as they qualify for a mortgage. The investor may assist them in a savings program in order to accumulate the balance of the down payment. The mortgage broker assists with the credit repair. The client benefits from any appreciation in the home beyond the option price and settles into a preferred lifestyle sooner than expected. For existing homeowners, a R20 agreement may prevent loss of the home due to power of sale or failed refinancing attempts.

For the investor – Attracts a better quality tenant during the rental process due to the pride of home ownership. The investor avoids the “nuisance call” from tenants for minor repairs where the client is obligated to repair and maintain the property. Allows the property to be pre-sold, without the need for additional real estate fees. Provides financial protection in the event the homeowner reneges on their responsibilities or fails to exercise the option agreement.

For the Realtor/existing homeowner – Allows them to qualify more purchasers. Clients that can’t obtain financing today, may still represent a potential sale opportunity.

For the mortgage broker – A mortgage for your investor and ultimately a mortgage for your client. Two mortgages on the same property, usually within a one to three year time period.

Smith also laid out the key elements of a rent to own deal – to read the rest of Smith’s article, check out the latest issue of CMP: Top 10 Commercial Brokers 2014.
  • James Loewen on 2014-08-27 11:58:46 AM

    We're finding a very common issue with these presently as clients come to us with previous RTO of 2 or 3 years ago now wishing to execute their purchase option, however many / most lenders will now not facilitate the financing to use the "credit" of the rent as eligible down payment.
    (that and most renters weren't given credit counseling sadly to repair and establish credit that would qualify for a 5% down purchase)

    RMG as a lenderhas notified they will facilitate these with condition:

    "We prefer to see that the purchaser to be entitled to a refund of amount set aside as the down payment." (and by prefer, it was required)

    However most ALL agreements we see state to the opposite as: "In the event that the buyer does not complete this transaction, any monies paid to the seller will remain with the seller and the buyer will not have any right to reimbursement of any kind"

    We have yet to find an Investor willing to give back the deposits and lease-option or sign off to change this wording.

    As such, great for the mortgage broker doing the mortgage and the investor obtaining the rents and lease option, however have a great concern for the tenants on ability to actually execute the purchase if lenders aren't willing to proceed.

    I'm assuming there's a lender willing to facilitate that Bruce has found, after my conversations with numerous lenders we haven't found one yet with the terms of the common RTO that would.

  • Andrew C. MacDonald on 2014-08-27 12:03:20 PM

    The trouble with rent to own these days is that it gets a bad reputation due to a lot of "seminar investors" putting together deals with little knowledge on mortgage qualification requirements.

    These deals then have very low odds of panning out since the clients are never able to qualify for the mortgage they need to exercise their option to purchase and complete the transaction.

    The real problem getting financing for rent to own at the back end is that the deal doesn't meet underwriting guidelines, not that anything is wrong with "rent to own" itself. On the last deal I did, our client is purchasing at 5% down even though they have 11.5% worth of credits towards the purchase price and they're still getting a rate of 2.95%. Most lenders will fund rent to owns if the deal meets underwriting criteria, down payment is properly documented from the outset, and the contracts are properly written with clauses required by CMHC.

    If you decide as a mortgage professional to offer rent to own as a lending alternative to your clients, these deals can actually be very win-win as long as they are structured well from the outset. At Ownership Solutions we only do deals where we have a clear and viable exit strategy for the client, keep all clients within 32/40% on GDS/TDS, and give a fair option price at the end to make sure they can qualify.

    These are absolutely win-win when done correctly, but will be win-lose (or lose-lose) when poorly structured as many "rent to fail" deals unfortunately are.

    Thanks for a great article shedding light on the win-win nature of RTO and giving some credibility to a strategy that sometimes gets a bad reputation.

  • Len Lane on 2014-08-27 12:31:17 PM

    As James says these only work if the broker does his job correctly at the beginning When its a bad credit scenario we take it one step further and make sure they work with our partner company Parley Consulting to fix their credit issues so that they aren't stuck when it comes time to switch out of the RTO.

  • Ron Butler on 2014-08-27 1:12:45 PM

    James / Andrew / Len all very good points here. The key to have a successful outcome for the "renter" is the careful advice at the beginning and follow up though the 2 - years to make sure the advice is being followed. It will work if all the parties do the right thing but it may blow up if someone drops the ball or if the careful work required to make repair the "renters" issues is not done.

  • Jesse(mortgage broker) on 2014-08-27 4:25:32 PM

    @James Loewen

    I couldn't agree with you more. I couldn't disagree more with this writer and I'm wondering if he's on glue or just got in the industry yesterday!! There's many more reasons why lease to own are SO bad!! First off, when it comes to the purchasers actually getting financing any appraisal done will likely come lower than the purchase price in an average market. If the home was worth the price the seller was asking for it he never would have had to sell it as a lease to own. Often sellers resort to lease to own because they can't get what they want for it within 6 months. Therefore if you can't get your asking price within 6 months it means it won't appraisal for that price. So at the time of mortgage financing the client will have to cover the shortfall(the banks won't finance more than what it appraises)and if the client odesn't have the extra money to cover the shortfall he wont be able to be approved and will lose the home and all the money he invested in the deal. There's so many reasons why lease to owns are bad for the purchaser. My friend used to own a big "lease to own" company and got out of the business because he realized it just wasn't fair for the clients. He had approx 35 homes on lease to own and we were only able to approve 1 of his clients after a few years. The contracts for down payment are never made according to the mortgage insurer(CMHC,etc) guidelines and 99% of people can't get financing. The guy who wrote the article should maybe consider finding another job or at least try to approve a few "lease to own" clients before recommending this non-sense. He so far off it's not even funny!!

  • Steve on 2014-08-27 4:55:38 PM

    worked with these a few times. A lot of disappointment for all. Never had 1 complete. I even had Scotia spell out exactly what they wanted to see in a RTO and Scotia turned the client down - failed on appraisal AFTER the client invested about $20,000 in renos. Clients bad habits don't change, predicting future property value is a nightmare, major repairs - "who pays when a hot water tank blows" is a nightmare, greedy sellers/ investors who fleece the client, then blame the broker who cant get financing 2 yrs later is a problem, Insurers and banks don't like RTOs...
    I would love a lender to set up an actual program for it... with CMHC backing. If the house was easy to sell, then why would the seller need RTO????

  • Ron Butler on 2014-08-27 6:27:10 PM

    I stick with the key point, it has to be done carefully up front. The problems start when the "landlord" does not care whether or not there is a real path to ownership for the "tenant". Always bad results there. It is key that some "tenants" be turned down at initial review, those that will never qualify in 2 years. But some of these arrangements can work, we are closing one this Friday; big caveat: there was a large initial deposit (marriage break-down) and the value increased to the point the mortgage is conventional. I am not saying it works every time and it will never work if the whole arrangement is not studied and qualified up front.

  • Greg Coggiola on 2014-08-28 9:18:36 AM

    Sounds as if you guys have similar issues to those here in Aus. However I agree With Ron. It's all about finding someone who will qualify for a loan a few years down the track. Don't put unemployed people on welfare in the home. There are many many people here in Aus that don't qualify for a traditional Bank loan, such as self employed and there are many that just can't save enough of a deposit. Typically here in Sydney the bank will expect to see anywhere from $4ok to $100K Aus (10%)as the buyer deposit, before lending the balance. Why shouldn't those people who don't have a big deposit have the opportunity to own their own home? an RTO is the perfect solution. The investor sets up the RTO so at the end of the term the new buyer has the equivalent of the 10% deposit already built up as equity in the house,. Then when it comes time for the bank Valuation in 3 or 5 years time the buyers option payments over the term combined with capital growth usually assures the bank will lend the balance. Also it helps when you have a very good mortgage broker that can get loans approved as they have done the hard yards with the banks and gone around the obstacles that may be thrown at them by someone lower in the food chain that normally approves the loans.

    many investors here in Aus are after positive cashflow from their investment for the life of it, and this is agreat way to do it. What about the houses that the agents are finding hard to sell. Set them up as a RTO and you open up the market to a much larger audience of house buyers than if you were to sell it the traditional way whereby only those with a large deposit qualify for your home. What about the run down house "the renovator special" that no one is prepared to Buy? Offer that to someone on an RTO and you will have people throwing them selves at you with gratitude to be able to have the opportunity to fix up a house and to be able to call it their Home.
    In Australia if you default on your loan you are liable for it, It's not like the USA where you can just hand back the keys and walk away from the house and loan without any recourse. So it can be a great way for people to prevent being foreclosed on and having to declare bankruptcy. I system of banking and the the regualtions put on lenders and borrowers is much more onerous than it is in the States (I'm assuming you canadians have a similar system to them?). However my point is it works very well here if done correctly.

  • Andrew C. MacDonald on 2014-08-28 10:43:14 AM

    Jesse, there is a distinction between property-first rent to own where a seller uses this strategy to offload a property they already own, and tenant-first rent to own where the tenant-buyer is properly qualified from the outset and able to shop for a home of their choice within a pre-determined budget. The success rate is much better in cases using the tenant-first method because they are better qualified and able to choose the exact home they like.

    If only 1 of 35 clients is able to exit the program, you’re definitely doing something wrong with rent to own. With proper screening and well structured deals the success rate should be 80%+ but the temptation to assemble poor quality deals is there if making money is your only objective.

  • Andrew C. MacDonald on 2014-08-28 10:43:26 AM

    Steve, the insurers will approve clients for mortgages on the exit of rent to owns so long as they meet the underwriting guidelines. The key to having that happen is just proper screening upfront and then working with clients during their term to make sure they complete the required credit repair.

  • Andrew C. MacDonald on 2014-08-28 10:45:32 AM

    Ron Butler, you nailed it. The success all depends on how things are setup to begin with and the attitude of the landlord.

    So, for any mortgage agents looking for a way to finance up to 90% LTV on refinances, or 95% LTV on new purchases for clients with bad credit, just be sure to work with a company who knows what they're doing so that the transaction works out to be a win-win for all involved.

    I quit my job at Scotiabank to do lease purchase programs on a full-time basis. Add me on LinkedIn if you would like to learn more on the topic - I'm always happy to help.

  • Guy Lew on 2014-08-28 11:03:51 AM

    I am reading the responses to this thread and I feel Andrew MacDonald has his finger on the pulse by speaking with experience. I myself own a RTO company and we transacted over 500 homes across Canada.

    I am the first to admit, not all rent to own deals work. We made our share of mistakes in the beginning back in 2008 and we took in 2-3% as down payment. The default rate sat at greater than 50%. Now we move moved towards a 5-10% down model for purchases and 10% for re-finance rescue files with much greater success. Our default rate now sits in below 10%.

    Do we have issues exiting to a mortgage? No....we have sent many deals to lenders, but there is a process. Not all lenders will do an exit mortgage, we just happen to have the experience because we have done so many deals. We work the deal with the insurer, provide that name to the bank underwriter with documents upfront and we get an approval. It also helps to know what the insurers want and it is up to us to provide that. To us, income is King. The employment income must debt service or we have no deal. Even for BFS, we are examining bank statements to make sure if we are going to Home Trust in the future, this client must be able to qualify with those bank statements. In terms of credit, we make sure all debts are cleared in the file, monitor the client on a month to month basis, this is not something most mortgage agents would commit to so we insist we do is not an option.

    We have been servicing the broker community for 6 years now under HOS Financial, we also develop a loyal following of agents wanting to stop the wave of power of sale made by other agents putting clients into private mortgages up to 85% LTV with no exits. We feel we are a necessary service because no one is thinking about the homeowners, the lenders and the insurers. Only private lenders and their lawyers benefit from someone else pain. We are here to pick up the pieces and try to make it work.

    I personally want the Federal Government to regulate all rent to own dealers so everyone stays ethical and comply to current lending rules. We joined CAROP (Canadian Association of Rent To Own Professionals) to set ourselves apart from the others. I would also like all mortgage agents to stop supporting these predatory rent to own programs that take small down, small option credits and exit the client with bad contracts, little to nothing down, and bad is not helping anyone...even themselves.

  • EX-BANKER, 14yr. Mtge. Agent on 2014-09-02 3:08:19 PM

    I had always had the mind frame (RTO's) are just a money grabber. As that is what I saw. Clients who were in 1 year contracts (told, don't worry, in a year you'll be able to purchase). Really, if your credit is bad 1 yr. ago, and client does nothing to change, it. You won't have a lender/insurer to get the deal done 1 yr. later. So, when I was approached by a new RTO, with a plan to pre-qualify (application, credit, etc.) I was impressed. RTO was even paying (a small fee) so I would provide a PLAN (to repair the credit, etc.) To me this was finally an RTO who actually wanted to see clients succeed in the purchase. So, I did my homework (lenders & insurers), the RTO set up the contracts, bank accounts, etc. to ensure they followed the guidelines. I joined forces with a RTO in Dec. 2000. I qualified the clients (using higher rates, which turned out to be great, since amortizations reduced). Each deal's option was worked out, based on how long it would take to repair credit (ie. paydown credit, collections, etc). A full detailed PLAN was given to the client. With consistent (monthly follow up by myself) When I started 10 lenders willing to do these deals. When they came due in 2012-2013 - 1 lender.
    In all honesty most clients didn't follow the program at all. Never updated as to their situation. Typically calls & e-mails went unanswered. And when the did answer - it was yes, all is good. When I requested proof that the plan was followed. The clients felt I was being too aggressive. So, when it came time to start preparing (started 6 mos. in advance) Their situations were typically same or worse. And all they had were excuses. And as some of you stated earlier, they blamed me and the RTO for the fact they couldn't get financing. Even though they didn't follow the detailed plan. Were behind in the down payment portion, had consistent NSF's with the RTO. Declared less income, etc. As well, overpriced property (think of the year of contract). Now, much of it could be based on the time of the contracts, vs the year they came due. There were lot's of changes in qualifications. But at the same time, I found the clients didn't really take responsibility. It seems since the RTO was paying (very little) for the services of assisting them to get back on track. But, still paying on behalf of the client to help them. Client's once again, sat back and expected everyone else to do the work. The RTO is no longer in business.
    Clients threatening to sue, etc. etc.(yet, they didn't follow thru - no surprise there). Yet, they didn't follow the PROGRAM. With all the planning, contracts spelled out very detailed (lenders & insurers were impressed with the contracts - they reviewed them). It still pretty much fell flat on it's face. With the exception of a few (3) out of 40. I believe there are some RT0's who actually care (the one I worked with had a good plan and really wanted to see it work). But with clients who didn't follow the program.
    Yet, it was the RTO and Broker's fault. Quite the norm "attitude" from the client. Never their fault. Which is why they probably had the credit issues to begin with. That may sound a little harsh ...but it's true (after 40 files, you see the pattern). I do agree, that the insurers should consider a PRODUCT GUIDELINE for RTO's. But I believe (based on my meetings with the insurers). You won't see that anytime soon. Insurers claim they changed the guidelines to protect the consumer " money back if they chose to withdraw"; from back in the day ... due to the BAD RTO's .But where does that leave the RTO's with the BAD CLIENTS???

  • Andrew C. MacDonald on 2014-09-02 4:48:40 PM

    Ex-Banker sounds like you had some harsh luck with this. I find we sometimes have to chase clients on the credit repair but a quick reminder their down payment and credits are at risk usually gets them to co-operate in the ongoing credit review process and take the steps required to improve their situation.

    The truth is the attitude of the client is key. You can give them every possible opportunity to succeed but if they aren't willing to do their part then they will fail whether it's with RTO or even a regular mortgage.

    Also, to clarify as has been said over and over, there is more than 1 lender willing to do RTO financing at the end of the term.

  • EX-BANKER, 14yr. Mtge. Agent on 2014-09-02 5:04:20 PM

    I don't want to get into a back and forth. I merely wanted to share my experience. I've been in the business over 30 years. So it's not like I didn't try with the clients, using all your ideas. If you have lenders - I'm sincerely happy for you. And that's not a jab at all.
    I spoke or sat personally with every lender, that had said they would do it. They all had a reason why they wouldn't do it (keep in mind this was Sept./Oct. 2013), or blamed in on the insurer, and vice versa (as I sat with insurers too). So, if you have lenders, care to share? As I would truly appreciate it.

  • Andrew C. MacDonald on 2014-09-02 9:32:14 PM

    Here is a list I had compiled in 2013 of lenders that would fund rent to owns from personal experience of brokers we worked with. Some of these lenders are gone (Firstline for example) and the list is constantly changing, but here goes:

    - BMO (toughest standards but still do it)
    - RBC (toughest standards but still do it)
    - Scotiabank (in Branch if you have a good contact)
    - TDCT (if client has existing banking relationship)
    - Firstline (did these deals until recently closed to new business, not sure if CIBC will continue)
    - Laurentian / B2B
    - Manulife
    - National Bank
    - Street Capital
    - Merix
    - Macquarie
    - Equitable
    - Radius

    In addition at one of the lender presentations we did this year Linda from Effort Trust confirmed they will fund RTOs and I have personally seen commitments from them for a client with credit that still didn't meet CMHC/Genworth criteria.

    The last deal I've personally seen funded was through Industrial Alliance and the client is getting great terms so you can add them to the list.

    The key consideration here is that underwriters at any lender are looking to lend on good risks, and not on bad ones. If a rent to own client is a good risk then you can package them as such and get the approval you are looking for. If they are still a poor risk at the end of the rent to own term then it'll be tough to get funding. It's about the client, not whether the deal is RTO or not RTO.

    I don't want to go back and forth easier, but I do want to quash the damaging myth that these deals cannot be funded because they can and I've seen it done over, and over, and over.

  • EX-BANKER, 14yr. Mtge. Agent on 2014-09-02 9:47:17 PM

    Hi Andrew, THANK YOU! Interesting each one of these lenders I personally spoke with or sat down with, and I actually submitted the deal to. With exception of BMO, RBC & Manulife. Since they wouldn't accept "independent broker" applications. And client did not want to pay "Broker Fee". Each one turned them down "due to insurers won't approve". This was once they reviewed the 3 contracts: 1) Rental 2) Option to Purchase 3 ) Actual Purchase Agreement. Except the "1" lender I spoke of earlier : Merix
    THANK YOU AGAIN for your GENEROUS INFORMATION. Much appreciated!

  • Andrew C. MacDonald on 2014-09-02 9:54:44 PM

    You're welcome, and again it sounds like a problem with the contracts (not rent to own itself) that prevented those from getting funded. We've never encountered this problem.

    CMHC added a requirement for a portion of the deposit and credits to be non-refundable in the event the client is unable to qualify or chooses to terminate the agreement. Our contracts contain the required wording, but even our early clients who signed our old contracts before adding this wording have been fine to get financing recently as their option dates have come up.

    To the best of my knowledge Genworth and Canada Guaranty don't have the same requirements for rent to own agreements so this should leave plenty of options.

    I'm happy to share all the info I have just so people realize these deals CAN be done, and without a great deal of difficulty.

  • Bruce Smith on 2014-09-10 11:09:47 AM

    Thank you for the feedback and dialog. This is a polarizing issue because many brokers simply don’t understand how to structure these deals property, but those that do can make it part of their product offering. For the record, I am also an investor that owns RTO properties and the percentage of my clients that have obtained mortgages on my deals is 100%. Jesse, the glue I am on must be superior to what you are using. LOL.

  • Andrew C. MacDonald on 2014-09-15 4:58:56 PM

    @Bruce Smith - thanks for confirming this can be done. We just closed another one on Friday without issue.

Broker news forum is the place for positive industry interaction and welcomes your professional and informed opinion.

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