Broker: Rent to own benefits all parties involved

Broker: Rent to own benefits all parties involved

Broker: Rent to own benefits all parties involved 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.
 
20 Comments
  • James Loewen 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.
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  • Andrew C. MacDonald 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.
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  • Len Lane 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.
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