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Mortgage Broker News | 13 Feb 2013, 10:00 AM Agree 0
A handful of con artists misusing the rent-to-own model are increasingly running afoul of provincial mortgage broker legislation, claiming they can arrange home loans without broker accreditation.
  • todd | 14 Feb 2013, 04:33 AM Agree 0
    By not knowing the details of the contracts everything in this article about 'leaving clients without recourse when deals go south' is meaningless. maybe the contracts do have all that figured out.. i'm not saying they do, but with out those details this article is meaningless and paints rent-to-own deals in a bad light.
  • Paul Therien - CENTUM | 14 Feb 2013, 05:05 AM Agree 0
    Rent-to-own has been around a long time, and it probably will be around for a long time. Although it may seem like a good option for some consumers who would otherwise not be able to purchase a home due to poor credit or inability to save a down payment, there has to be some serious caution taken before anyone considers entering into this type of an arrangement. Recently I spoke to some people who did the rent-to-own plan for their own home and what I heard was a common theme I have been hearing for the past 20 years.

    They made a purchase agreement at a set amount and after their 2 year contract was due they proceeded to source mortgage financing - through a mortgage broker, sadly not CENTUM, but at least they were smart to use a broker. The issue was that the purchase amount they committed to on the original contract – was greater than the actual value of the home today. (Most rent-to-own contracts use a “future value” estimation and do not take into account market flux. In fact many contracts have stipulations in place that allow for an increase in value up to a certain percentile, but they do not ever account for decreased value or flat valuation.) When they attempted to source a mortgage the value of the home was 25K less than the contract price, and as a result they could only get financing on the reduced amount – plus a vendor take back mortgage, which means that they are now owners of a home, but can barely meet their financial obligation due to a total cash outlay each month that is significantly higher than they had planned. If they did not close on the purchase, they lost the down payment ($15,000.00) that they had accumulated. Add to that they were told, “we have an offer on the place - if you do not close they will”. There may very well have been an offer, but unlikely.

    This puts the consumer in a sticky situation… lose the accumulated funds that they have paid, or purchase a home that is valued at less than the sale price. Rock; meet hard place. The number of people who end up not being able to qualify for the necessary financing is higher than most think, and that means they end up with a high interest private mortgage they can barely afford.

    In any rent-to-own situation there should be a “right of first refusal” registered on title in favour of the renter, but this rarely happens, and as a result people end up with very limited protection. Rent-to-own agreements almost always will favour the seller of the home.

    Any consumer who is considering a rent-to-own scenario should be seeking independent legal advice for a full review of the agreement. The challenge is that most people who enter these agreements are not savvy consumers and they easily fall prey to the dream of being a home owner. A dream that any skilled mortgage broker could also help them achieve with careful planning, coaching and time.
  • Rhonda - Verico | 14 Feb 2013, 06:06 AM Agree 0
    It is the numerous fly by nighters that give RTO a bad name. Paul has brought some very good points. Use a RTO company that has researched the market where properties are being purchased and apply very moderate appreciation factors to determine the future PP of the property. ILA is critical. RTO certainly has its place in just need to research the companies who offer the program.
  • Bret Dobbin | 18 Feb 2013, 08:36 AM Agree 0
    By way of full disclosure, please note that I submit my comments not only as a mortgage planner for Mortgage Architects in Winnipeg, but also as a rental property owner who has purchased many investment properties on a RTO basis (from 1988 to 2010) and has also offered to later sell several of those properties with a RTO contract (from 1997 to 2012). These comments represent only my personal view and not a corporate opinion.

    My coaching (for all parties on both sides of the contracts) would be to ensure that ILA is engaged (even if any of the parties are family or friends and even if they want to decline to do this), and to properly register the renter/purchaser as a caveat on the property at the local Land Titles Office (even if either/both parties don't understand the importance of doing this).

    In most cases, those renters/buyers entering into a RTO contract are not financially-savvy or well-educated would-be home-owners. It is my duty to not only explain the process, and the potential rewards along with the potential risks, so that they can become more sophisticated investors.

    Amazingly, I have always found that would-be purchasers invariably do not exercise their option to purchase (mostly due to divorce, job-loss, or change of plans to move out of province). Assuming it's been a good tenancy arrangement, I always offer additional 1, 2, or 5 year extensions to the contract if it's simply a matter of not being yet able to qualify (partly because i do want to help these folks achieve the dream of home ownership and partly because i want to do the eventual deal as their mortgage broker), and yet they still do not exercise their option to purchase because their reason for exiting the RTO has nothing to do with price, equity, value, investment, logic, etc ... it always has to do with life changes.

    Therefore, what i elect to do (although not legally or morally obliged to do so) is return 50% of their accumulated equity in the RTO agreement (in exchange for their agreement to remove the cavaeat on the property). In the case of a divorce that causes the cancellation of the RTO, i divide the 50% rebate equally and give it to each of the lawyers in their domestic case.

    As for the benefits to me the landlord, i find that i have a better-calibre tenant, a well-intentioned would-be homeowner who takes better care of the property, and a more-consistent paying tenant who handles his/her financial responsibilities in a more timley fashion.

    As for the renter/buyer, they get access to better housing (here in Winnipeg, the vacancy rate is less than 1%), and even if they don't exercise their option, the overall total amount that they paid for RTO (when factoring in the rebate that i give when they cancel) is only slightly higher than what they would have had to pay to rent a house during the time of the failed RTO deal.

    The key is to be fair all-round for both parties, offer a win-win scenario, ensure ILA, and balance profit/potential with risk/reward for both parties.
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