Rent to own, good or bad?

I recently saw an article by CBC that hit close to home the other day regarding rent to own and it was referred to as a “scheme”.  They were exposing a deal gone bad involving an unlicensed person who makes his living doing a well-known US strategy called sandwich leasing.  Essentially getting sellers to agree to option him their property at a certain price allowing him to market it as a rent to own home on sites like castanet and his website.  He makes his money on a portion of the rent each month, and since he is selling his contract with the seller, he keeps whatever up-front deposit the new rent to owner has to put up.  If the deal goes wrong, which it did in this case, the seller is left without any cash deposit, and no recourse to get the person out of the house.  There is no real estate board or council to call, the paper work they have doesn’t even address this kind of situation.  They are in a bad spot, and I can totally empathize with them.  A scenario like this puts “Rent to Own” in a bad spot as well, it makes it seem predatory or unethical.  And this is where I feel I need to add some perspective.

Having an understanding about rent to own is something that will serve you well regardless of whether you are a buyer looking to get into the market, a seller looking to get out of a property, or an investor seeking significant returns through real estate, in the safest, most hassle free way possible.

Some local licensed real estate brokerages do offer a fully accountable version of rent to own.   It was born out of necessity as the market became challenging.  Regular clients needed a solution beyond the traditional buy or sell method.  This is what we call a hybrid strategy; it’s the middle ground between renting and buying.  It represents a compromise that produces real benefits for both parties and it gives prudent real estate agents another option when serving their clients.

In recent years, as sellers faced being upside down on their properties, meaning they had less than zero equity left in their home.  A common example of this would be someone who bought with 5% down in 2006 or 2007.  If they had a need to move today they would likely be faced with this reality of being “underwater.”  Their only options, it would seem, would be to drop their price by a further 10 or 15% to get the place sold, which would usually mean a loan from a loved one just to pay the mortgage and fees, or they could rent it and take on all of the risks associated with renting your home such as damages, vacancy and deferred maintenance costs, couple that with the fact that most of these homes don't rent for enough to cover their mortgage, taxes, insurance, management and maintenance.  They would be left subsidizing their renter’s living situation considerably for an unforeseen amount of time.  Not a great spot to be in.

Or what about the buyers who have some money for down payment and have decent credit but no longer make the cut with the new lending requirements tightening up after the feds raised the qualifying rate and shortened the amortization periods from 30 to 25 year amortization?  This affected roughly 15% of would be buyers.  Would they be destined to rent forever now?

Having studied the rent to own or lease option program for some time, it became very apparent to me that done correctly and done with honesty, transparency and integrity, this program is exactly what the two above-mentioned scenarios needed to solve their respective problems.   

Here’s how a proper rent to own deal would go done through a brokerage. Firstly the agent would not place themselves into the deal as middlemen; Meaning they wouldn’t first sign an option with the seller creating an  interest in the property.  They would market the property like any other on the MLS. The price and payment based on a consistent model.  A model based entirely on the realities of home ownership.  Buyers should make the same payment as if they had financed the home today including property taxes.  They should build equity in the home at the very same rate.

It should require a healthy up-front deposit to be in a rent to own program, this deposit is paid to sellers as this becomes a welcomed cushion as well as making sure the buyer has enough skin in the game to prevent vacancies.  The result is a future buyer, living in the home with a monthly payment that covers the seller’s costs in the interim.  They get credit for the portion of their payment that goes toward the mortgage principal.  They assume the responsibility of maintenance and treat this property like their own.  That’s because at the end of the term, it actually will be.

Properly executed Rent to own programs set buyers on a course toward successful completion.  The length of term is set based on their unique situation, they should meet with a mortgage broker to determine the appropriate timeframe and get some guidance as to what needs to happen between now and the end of the term to ensure success.  Sometimes it need only be 1 year, some people require up to 5 years.  A good program should be set up to be mutually beneficial the whole way through.  The sellers should receive a higher price for each year of the term requested to keep step with inflation so they too participate in the benefits of ownership over time. 

No deal is without some inherent risks.  A traditional sale comes with a whole host of potential risks, and occasionally deals go south.  People ask what if they cant close?  To this I say a potential buyer not completing is a real risk every seller faces in every deal not just rent to own.  This is why a licensed realtor, trained to write proper agreements, facilitate adequate deposits and engage in buyer screening is important whether you are selling or lease-optioning your property.  No deal can be fool proof, there will always be fools out there but when things are done properly you can go a long way to mitigate these risks and accomplish your goal. 

Whether you are a buyer, seller or investor it would be worthwhile having a conversation with your real estate professional about rent to own.  Don’t believe everything you hear or read.  A deal going sour shouldn’t paint all rent to own deals with the same brush.

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About the Author

AJ is the owner of Kelowna’s downtown boutique firm, Vantage West Realty. The firm takes pride in breaking the mould when it comes to how they practice real estate. With a well-deserved reputation as a real estate renegade, Hazzi has been shaking up the Kelowna real estate scene since 2002.

Having been a student of real estate through two market cycles, AJ has come to see an absence of truly qualified professionals specializing in investment real estate. This has become AJ’s role within the firm and the community: To educate clients on how to achieve financial freedom through real estate.

Arming his clients with knowledge on where to find positive cash-flow, how to renovate for profit, and other creative avenues that most agents completely ignore, Hazzi has carved out his niche as a real estate investment advisor (REIA), and loves nothing more than educating people on the right strategy to capitalize on both boom and bust years.  AJ is a firm believer that the Kelowna market is rich with opportunity, if one knows where to look.

If you are in search of an advisor who practices what they preach, consider that AJ has built his own real estate portfolio up to include multi and single family cash-flow rental properties, development property, resort property, fix and flips, and commercial properties. By sharing the lessons learned from his own experiences, his clients get the knowledge and confidence to invest without having to make the expensive mistakes he and many new investors have made along the way.

His goal is to impart on people, especially of the X and Y generation, that depending on RRSPs and Government Pension Plans to look after us down the road is risky business. Most people don't realize that as little as one or two properties added to your real estate portfolio now, can secure a comfortable, even lavish, retirement.

Bringing a consultant's approach rather than the tired, old-fashioned sales approach, AJ and his partners offer a world class service from finding, pre analyzing, and negotiating your next acquisition, to property management, all tailored to today’s busy investor.

To hear what AJ Hazzi's clients have to say about his service view the testimonials.

Contact Information

For more details or to reach AJ Hazzi, please visit www.vantagewestrealty.com

Email [email protected] Cell 250.864.6433

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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