Broker worried rent-to-own gains may cost industry

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A 400-per-cent increase in business for a rent-to-own lender is raising concerns among brokers, worried the industry is opening itself to future litigation by placing clients in those deals.

“I think every mortgage broker in this country needs to think very carefully about referring a client to essentially ‘quit claim’ their home and start paying the new homeowner, or landlord, rent with a plan to get the house back,” mortgage broker Ron Butler, with Verico Homeguard Funding, told MortgageBrokerNews.ca. “The fact the broker receives a referral fee pulls the mortgage broker in to something that may result in litigation in the future. Let's face it, when we arrange a mortgage, it is a transaction with a 100 years of history, case law and disclosure behind it. This kind program needs another two years before anyone actually knows the results. Tread carefully.”

The comments follow news that year-to-date, Home Owner Soon Inc. realized a “400-per-cent growth in the value of its funded deals,” compared to the year-ago period, company president Guy Lew told MortgageBrokerNews.ca this week.

The two biggest drivers of that growth spur, he said, “have and continue to be that we are gaining name recognition and a following with brokers, but also that the economy continues to present a challenge to many Canadian families. The truth is so many of us are only a paycheque away from losing our homes.”

Lew and his team of six BDMs, scattered from coast to coast, are actively promoting their rent-to-own model as an alternative to eviction, relying on brokers to hawk their wares – a requirement set down in legislative changes both in Ontario and other regulated provinces.

The strategy is paying off, said Lew, pointing to growing broker buy-in for his refi buy-back – accounting for 80 per cent of his business. Under the terms of that agreement, brokers access 100 basis points in finder’s fees for referring clients, who, in turn, agree to sell their homes for “fair market value” to one of Lew’s private investors.

Those types of programs aren’t new to the industry, said Butler, who gained his insights from past work with a similar company no longer in business offering a similar plan. “It seems to me that while a very small minority of the clients came out the other end happy, the vast majority – 80 per cent to 90 per cent – were financially damaged and angry with the company. I learned this early with that company and ended my relationship with them years ago.”

That doesn’t necessarily match Lew’s albeit limited experience, given the company's relatively short time in the marketplace.

“Our default rate of about 10 per cent speaks to the success of our program,” he told MortgageBrokerNews.ca, suggesting higher security deposit requirements translate into higher down payments, which, ultimately, make his rehabilitated clients more attractive to A-lenders.

  • Joe on 2011-07-30 3:27:32 AM

    I'm led to think that the broker who showed the fear may have dealt with some private lenders in the past who may have had second intentions with their clients and now he may be putting everyone in the same category... it would have been wiser for mr butler to educate himself on the details of these transactions, and then speak up...

  • Amuzed Broker on 2011-07-30 5:12:36 AM

    LTO or RTO has been around for years. The past companies that Mr. Butler is referring are likely doing Sandwich Leases or Leases where contracts are not air tight. I agree with Mr.Butler...LTO has been around for years and given his background it is surprising he is taking the stance he is...maybe Mr. Butler lets his client's lose their home when they have a life changing event...all I know is I have had 2 people out of 4 graduate from Home Owner Soon's program...Maybe Mr. Butler is just lookig for some free advertising...promoting yourself while publicly challenging someone else's buiness says enough about the source...We are a 180 Million dollar brokerage and use Home Owner Soon as an alternate Sub Prime lender. My recommendation is get the facts from the source. You might be pleasantly surprised.

  • Home Owner Soon on 2011-07-30 7:45:45 AM

    I am so glad this article has garnished a lot of attention, and rightly so. Since the Home Owner Soon program was introduced into this market about five years ago, we have saved many families from eviction and the lost of dignity of losing their home during a power of sale situation.

    We studied the competitive landscape for rent to own providers throughout Canada. Most were small groups of investors looking to fill an existing property, small developers stuck with inventory and even property managers looking for an angle to attract new tenants. Most of these files aren't underwritten with today's underwriting lending policies. Income was ignored and deposit's were light, or whatever they had in their pockets at the time and these deals generally don't go anywhere since there is an absence of a sizable down payment that a bank lender will require in the future. Another major obstacle was the bruised credit, they were generally low, untouched and these files would normally get declined.

    With the reduction of sub-prime lenders in Canada, families with bruised credit, only option is to sell their home or possible use a predator-like private lender and pay really high rates with lender fee's. At Home Owner Soon, we saw there was a void in the market between existing sub prime and private lenders.

    We wanted to make a difference for families looking at losing their homes instead of facing 10% lender fee's and 18% interest rates. Our lease rates are generally half of that and in many cases we have reduced their monthly living cost.

    We try to build a file with 15% equity at the end so the mortgage agent can at least have options to bring their client into a bank lender and not to another private with high fees. To further enhance our program, we suggest they pick one of the five credit rebuilding teams that will help fix the problem that brought them to Home Owner Soon in the first place. We try to control the results, hence why we have a excellent switch transfer rate.

    The mandate for Home Owner Soon (HOS) is to help families in need and give back to the community instead of imposing a glass ceiling for home buyers. Our industry measure success by the amount of dollar's we fund, we measure it by the amount of homes we can save. I think this makes the mortgage agents that refer us files...hero's to their client.

  • Question on 2011-07-30 10:40:40 PM

    For someone that is going to need to get a new hiratio mortgage to buy back the home in a few years how does any rent to own program help if all the former derogatory debts are not paid out and sufficient new credit obtained that is reported to Equifax or TransUnion to meet the insurers' guidelines? Is it not better for the homeowner to sell the home, resolve old debts that are hanging over them, rent an affordable home for a few years an affordabale home and rebuild their credit so that after a couple years they can then buy a home-without all the costs of a rent to own program. basic question is what if they dont qulaify in a few years and the landlord is not willing to hold out for a longer time where does that leave the consumer ?

  • Ron Butler on 2011-08-03 5:42:38 AM

    Unlike all the the other people (apart from Home Owner Soon) posting on this thread, my name is right out there in black and white. I am not skulking behind "Amuzed" or "Joe" and
    I have ZERO fear about stating my case against factually incorrect comments.
    1) If two out four clients "graduated" from the program that is a 50% failure rate. Hardly sterling results for families putting their financial futures and the roof over their heads into a brokers recommendation.
    2) "I should educate myself on the details of the transactions" what sense does that make? If every single file is unique? The credit ratings are different, the employment statuses are different, on and on; so no two are the same. The final results depend on factors not known until 3 years in the future. How can I be "educated"?
    3) I am looking for free advertising? How?
    I don't deal AT ALL with other brokers or agents; so who am I advertising to in a mortgage industry publication? I have never recruited an existing broker or agent in my 15 years in the business, so again: who am I adverising to?
    While I think $180 Million makes "Amuzed" a very successful brokerage; my family and I operate $350 Million in mortgage volume although I am unsure what difference mortgage sales numbers make to the questions raised here.
    4) The point about letting my clients lose their homes is just silly. If someone comes to us in arrears on their mortgage, we advise them about time tested options and often the best and most rational option is to sell their house and take the remaining equity to start to rebuild their lives.
    I have never said the Home Owner Soon will provide bad results in all cases. Some will succeed and some will surely fail, I simply want nothing to do with the future consequences of failure.
    My point was really quite simple. When we broker a mortgage transaction for the public it is an easy to understand transaction that is occuring NOW with full disclosure of all facts to the to the borrower or the investor. When we send clients to a third party and receive a fee for a result that will not be fully known for 3 years how can we know what the ultimate result will be? How can we know for a certainty that we will not be faced with a very upset family in 3 years?
    Finally I always worry about companies who say there main work is "helping families" not making money. I am pleased to tell you that in my business we are here to make money first and foremost. I enjoy the fact we can help some people along the way but without making money I could not afford to help anyone.

  • How Owner Soon on 2011-08-03 6:30:18 AM

    We can't comment on other rent to own companies since this side of the industry is not regulated. We can safely say in order for us to approve any file, there has to be a clear solution in place to rid of debt, rebuild credit, and strong behavior modification.

    Our maximum TDS allowed is 40% and GDS is 30%, and this includes any consumer proposal payments that needs to be in place if we are not able to pay off existing debts. As far as I know, this is within industry guidelines. From my understanding, bank lenders will not take consumer proposal or bk client's and yet we do.

    Our initial credit coaching session, after close, last 3 hours of grueling budget work, followed by monthly credit coach mentoring so they don't escape from doing financial home work. Can a file goes side ways? Yes it can, it could be from a loss of job, sickness, marriage breakup and even death. We make every effort to make sure the tenant is successful through our program.

    The question about selling the house is a great question and often asked. Yes you can sell your house and move your family into something more modest, that is one option. The other is if they could afford the lease (30% GDS), pay off all existing debts, rebuild credit and still allow the family to stay in the home without your neighbors whispering behind your back, could be a better option? Many of our agents are considered hero's to their clients.

    Our program doesn't work for every application, we do decline files that don't meet our guidelines when it comes to income, location and house quality. But the ones we do help, we try to go beyond what is expected.

  • Amuzed Broker on 2011-08-03 7:46:25 AM

    Dear Ron...I have not put my name out there because I do not want people to put me on your level. Your math is correct...2 out of 4 graduating is a 50% rate...when the other 2 graduate it will be 100%...Enough of that...you spend time putting yourself out there Ron...I'll look after your clients that call my office because you are unavailable while writing these silly notes.

  • John Dearin on 2011-08-04 9:04:55 AM

    Ron,

    I believe in using my name as well, I don't need to hide behind a nom de plume for any reason. Keep up the quality posts, your comments are welcome and respected by most. I see a place for this type of "Lender" in our market. In most cases it is cheaper than a private lender. We have our own exclusive lease to own client (just signed up with a second exclusive client) that we use and have been successful in placing eight clients that would otherwise have either lost their home or be out renting or worse yet, paying 15% with a private placement. All have three year options to buy out. It should give them time to correct the issues that put them in this situation, butI can't comment as to the success rate, as I have shied away from this industry due to a previous bad experience. But we are unfortunately seeing more people needing this service. Hopefully we will see 100% success rates, time will tell.

  • Andy on 2013-12-01 3:06:44 AM

    I recognize this is an old thread, but can't resist. I've done 3 rent to owns so far as an investor, one the tenant took off to another province and didn't return my calls, one is about to close after 5 years with a wonderful tenant, the third we decided to GIVE the house to the tenant after a few years (not the best financial solution for us, but money isn't everything).
    Anyway, it seems like detractors are taking shots at the RTO industry because it "preys" on victim tenants, but lets be honest: I didn't get that tenant into debt, into this situation. They did and they need to learn to bail themselves out. I'm just there to help with a forced savings plan. Many people can't save for retirement, but when it's automatically coming out of the rent, that's a GOOD thing for some of these people who would otherwise just keep their MASTERCARD providers well-funded.
    And let's be honest, it's worth $$$ when your kids don't have to be evicted, when your extended family doesn't have to hear. If i can save someone that shame and stress AND get their life on track. Yes I'm going to charge a price for it, but it's worth it.
    Sometimes it's financially better for the tenant to just lose their home.....but if they were financially literate enough to do things on their own they wouldn't be in this situation so meeting me just enables them to break the cycle instead of ending up going around the same mountain in another 5 years.

  • Ron Butler on 2013-12-02 7:56:14 AM

    You are doing this as an individual assessing each case on its merits and clearly based on what you say you are NOT just here to pillage people under terrible economic hardship. The 3 examples you gave indicate fair dealing and patience. This is not the same as corporations running a vicious game on vulnerable consumers.

  • Unhappy Renter on 2014-05-15 4:28:38 PM

    why don't any of these threads have testimonials from the people who are actually in the rent-to-own situation. Seems to me that their comments would say whether or not this program is successful, wouldn't you think?

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