The 9 Rent-to-Own Risks
Nobody Likes Talking About
Copyright © rent-to-own Match Makers
www.RentToOwnMatchMakers.com
Email: [email protected] Copyright © rent-to-own Match Makers
www.RentToOwnMatchMakers.com
Email: [email protected] Introduction
Rent-to-Own home ownership is an alternative lending solution for home buyers that are unable to qualify
for a traditional mortgage. It is meant to be a winning strategy for everyone involved. This includes the
mortgage agent, the home buyer, realtors, the Rent-to-Own company, and the sponsoring investor.
With the help of a sponsor, a home buyer who is unable to qualify for a mortgage the traditional way can
get into a home of their choice in as little as 6 weeks. The sponsor has a pre-qualified buyer living in the
home from day one, so this strategy creates a “win-win” for both of you since they do not need a realtor
when the time comes to sell you the home.
Every Rent-to-Own solution provider is quick to talk up the benefits of this strategy, but they usually don’t
like talking about the risks involved with it. The risks are real and since they have the greatest impact on
you, the tenant-buyer, it’s an important conversation to have.
In this short report you’ll learn how you can protect
yourself from unethical Rent-to-Own companies
that really don’t care whether you succeed in
buying the home or not. These “Scorpion”
companies (because those victimized by them are
left feeling the financial sting for a long time) prey
on uninformed home buyers desperate for a
solution and someone to help them.
There will always be bad apples in every industry
that only look out for themselves. The Rent-to-Own
industry is no different. The opportunity to profit
from helping someone in peril also presents an
opportunity for abuse that’s difficult to prevent. Whether the abuse is intentional or the result of
incompetence, the negative stigma that follows makes it more difficult for the serious professionals
to help people like YOU achieve their goal of home ownership.
We’ll share the 9 common risks used by unethical companies in the Rent-to-Own industry to take
advantage of the uneducated consumer, and what to do about it. By reading this brief report you’ll
understand exactly what to watch for in choosing a Rent-to-Own provider that is dedicated to helping you
succeed in eventually buying your home and making this solution a win-win for you too.
The 9 Rent-to-Own Risks
There are many unethical Rent-to-Own providers who take advantage of home buyers by ignoring or
leveraging one or more of the following risks. Be warned that if you fail to recognize any of these risks,
you will also likely fail to buy the home and end up losing your deposit and option credits.
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Email: [email protected] The 9 risks that unethical Rent-to-Own providers don’t like to talk about are:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Optimistic Budgeting
Accelerated Rent-to-Own Terms
Inflated Option Prices
Defective Homes…Buyer Beware!
Failing to Understand Agreements
Down Payment Deficiencies
Market Cycles
Poor Credit
Change in Sponsor’s Circumstances
Failing to recognize any of these risks can be a serious setback in your
goal of home ownership. By avoiding these pitfalls and working with the
right company, Rent-to-Own solutions have helped many families to
succeed financially - it will help yours too.
Risk #1 – Optimistic Budgeting
The number one risk to be aware of when buying your home is overextending yourself financially.
Whether you are obtaining a traditional mortgage, working with a private lender, or purchasing using a
Rent-to-Own program, it is very important that you stay within your budget.
The primary reason for failure in home ownership, regardless of the
lending product, is a default by the home owner. Scorpion
companies know this and use it as a way to steal your down
payment. Instead of encouraging you to stay within your budget,
unethical companies will try to convince you to purchase a home you
cannot afford knowing that you won’t be able to afford the payments.
When this occurs it gives them the ability to take your deposit.
Here are 2 guidelines from CMHC (Canada Mortgage & Housing
Corporation) on affordability:
Affordability Rule 1
The first rule is that your monthly housing costs shouldn't be more than 32% of your gross monthly
income. Housing costs include your monthly mortgage payments (principal and interest), property taxes
and heating expenses. This is known as PITH for short — Principal, Interest, Taxes and Heating.
Lenders add up your housing costs and figure out what percentage they are of your gross monthly
income. This figure is called your Gross Debt Service (GDS) ratio. To be considered for a mortgage, your
GDS must be 32% or less of your gross household monthly income.
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Email: [email protected] Affordability Rule 2
The second rule is that your entire monthly debt load should not be more than 40% of your gross monthly
income. Your entire monthly debt load includes your housing costs (PITH) plus all your other debt
payments (car loans or leases, credit card payments, lines of credit payments, etc.). This figure is called
your Total Debt Service (TDS) ratio.
Source: CMHC (Canada Mortgage and Housing Corporation) - http://www.cmhc-schl.gc.ca/en/co/buho/hostst/hostst_002.cfm
We recommend that you stick to these guidelines regardless of whether you are financing your home
purchase with a mortgage, private lender or Rent-to-Own program. If anyone tries talking you into
stretching beyond your budget and ignoring these guidelines, then red light - this is warning sign #1.
An optimistic budget is an inflexible one, with little room for variability, and limited or no contingencies to
account for the unexpected. This type of budget requires that everything go according to plan, may be
dependent upon future events materializing that are beyond your control, or even limiting your means to
afford it. There is another word used to describe this – unrealistic.
Your budget must be realistic at minimum and include consideration of only your present circumstances
and lifestyle. Stretching yourself thin is better suited for Yoga, not your finances.
Ideally you should consider a pessimistic budget which accounts for unexpected life events that could
impact your finances and the ability to afford a rent-to-own (like unemployment, an accident, or death in
the family). Then develop a plan that addresses these scenarios. We suggest choosing a life insurance
product to help offset and mitigate some of the risks.
Risk #2 – Accelerated Rent-to-Own Terms
Another common risk that buyers often fall victim to
is entering a Rent-to-Own program where the term
is too short. While “instant gratification” may be a
characteristic of our society, time is your ally in
overcoming whatever obstacles are preventing you
from getting a mortgage today. Bottom line…it will
require some time, and patience, to fix any issues
on your credit report, accumulate a larger down
payment, and build a strong track record of income
or employment stability.
Some irresponsible companies will encourage you
to enter a 1 or 2 year Rent-to-Own program
knowing that it will take you longer than that to
qualify for a mortgage. They also know that it may
be difficult for you to manage the higher monthly
payments that usually come with a shorter term since
you must still save a minimum down payment, but in a shorter amount of time.
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Email: [email protected] Sound familiar? It should because it leaves you exposed to the same risk we explained with optimistic
budgeting. Again, this is just another way for them to collect your deposit and patiently wait for you to fail.
To manage this risk, be realistic about how long it will take for you to qualify for a mortgage. Start by
ensuring your Rent-to-Own term positions you to succeed by allowing you enough time to qualify.
We suggest using the third rule in our Rule of 3s - 3 year term. A three year Rent-to-Own term is a
common feature for most families since it typically offers the most manageable monthly payments. Before
entering a Rent-to-Own program we also recommend consulting with a mortgage broker or credit repair
specialist to get a better understanding of your current situation and confirm how much time you’ll likely
need.
Risk #3 – Inflated Option Price
Overinflated option prices are one of the easiest tactics for Scorpion companies to deploy against
uneducated buyers. Don’t let yourself fall into this trap.
High option prices are achieved in 2 ways:
1. Starting with an inflated purchase price
2. Using an aggressive appreciation rate
Most Rent-to-Own providers will start off with the market
value for your home, and then add appreciation to the
home at a fixed rate (say 4% per year) to calculate your
option price. This option price is what you will pay for
the property at the end of your term. However if the
starting price is too high, or they apply an overly
aggressive appreciation rate to that price, your option
price will end up being too high which creates a new set
of obstacles.
If the home does not appraise for close to what your option price is at the end of your Rent-to-Own term,
you’ll have trouble getting the mortgage needed to buy the home once you exercise your option. If you do
not buy the home then you could also lose your deposit and accumulated option credits.
You can avoid this risk by using the first rule in our Rule of 3s - 3 X your Gross Household Income = the
Current Market Value. This is a quick and conservative calculation to ensure that your sponsor is buying a
home that you will be able to afford. This value is your budget limit.
You should also enlist the services of a realtor to help you understand the value of homes in the area
where you are buying, and what the historical price trends look like. A Realtor can show you the values of
comparable home sales and give you more information on appreciation rates in the area. Remember!
Never agree to an option price that begins with an inflated market price or is calculated using an
aggressive appreciation rate.
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Email: [email protected] Risk #4 – Defective Homes …Buyer Beware!
There are two approaches typically used in creating a Rent-to-Own transaction that every buyer should
understand.
1. The first approach is known as “tenant-first” Rent-to-Own. This method allows you to select a home of
your choice as any traditional buyer world.
2. The second approach involves selecting a home from an investor or company’s existing inventory. This
method is called a “property-first” Rent-to-Own.
In a tenant-first Rent-to-Own scenario you have a wider selection to choose from, with the only limitation
being your budget. Under this approach you’ll usually work with a Realtor to choose a home, and go
through the same offer process, home inspection and closing period as a regular buyer who is approved
for a traditional mortgage.
The property-first Rent-to-Own requires the buyer to choose a home which an investor or company
already owns. The main advantage here is that it enables you to get into your new home immediately.
There are however two potential issues that a buyer should be aware of.
The first issue arises when a Rent-to-Own provider is influenced solely by profit or avoiding further losses.
Their primary motivation may be leasing-up a property that has been vacant for some time or has been
difficult to sell. As a result you may be confronted by hard sales and pressure tactics which only serve to
increase the likelihood of the previous three risks becoming a factor.
Of greater concern is the increased probability of
ending up with a problematic home. In a property-first
Rent-to-Own, there usually isn’t a home inspection
available since the property is already owned.
Therefore there is no way to know exactly what you’re
buying.
To reduce this risk we suggest having any home you
wish to purchase inspected by a professional home
inspector. Notice we said reduce the risk. The truth is
that a home inspection does not eliminate the
possibility of buying a defective home. As with any
traditional home purchase the old mantra remains true
– Buyer Beware!
Many tenant-first Rent-to-Own companies require that you pay for the cost of this home inspection
(usually $300-$400), but it is better to know exactly what you’re investing your hard earned money into
before you commit thousands of dollars to buying a home by signing a cheque. Should you decide to work
with a property-first Rent-to-Own company then you must insist on getting a professional home inspection
completed so you can be sure the home is sound.
If you encounter any resistance remember that you’re the one paying for the inspection, so you must ask
yourself “what are they hiding?” Be prepared to walk away otherwise it could be an expensive lesson.
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Email: [email protected] Risk #5 – Failing to Understand Agreements
The risk of not understanding agreements is a critical one mainly because it includes three hidden risks.
The risk surrounding Rent-to-Own agreements comes with simply not recognizing the elements which
present the greatest risk to your ability to succeed in buying the home. If you don’t recognize the risks
present in how a Rent-to-own is structured, the disappointment of not qualifying for a traditional mortgage
today will come full circle when you’re unable to qualify for a mortgage to buy your home at the end of
your lease term.
Every Rent-to-Own provider loves to talk about the long list of benefits in this strategy, but they usually
won’t go out of their way to point out the many risks involved. If they are unable to have a blunt
conversation about the risks, or offer solutions to addressing them, this may be sufficient reason to doubt
their integrity. It is important to trust your instincts.
Once you have an explanation from their point of
view, you should seek independent legal advice to
confirm what you’ve been told and identify any
discrepancies. These discrepancies are not limited
to what may have been said. The impressions you
received are equally important to confirm and
clarify.
It is important to remember that when you seek
legal advice it is not to rewrite the contract. That
said a lawyer may attempt to do just that. This is
fine since they would prefer the agreement be in
your favour. It is their duty to keep you from
entering into what they think may be a bad deal. It’s
what lawyers do.
It also isn’t necessary, can become very expensive, but worst of all, it may convince your sponsor that
you’re not an easy buyer to work with. Remember this: Your sponsor is investing a lot of money to buy the
home on behalf of someone they do not know and risking their personal credit in the process. They
deserve to be protected from any damages that might arise should the arrangement not unfold as
intended. Otherwise there wouldn’t be Rent-to-Own solutions available to you as an alternative.
For most people, buying a home represents the largest purchase and most significant asset they will ever
own. With that in mind, it is important to be sure you understand any agreements you sign with a Realtor,
mortgage lender, or Rent-to-Own provider.
While agreements vary from one company to the next, the next three risks represent the critical
components of most Rent-to-Own contracts.
Risk #6 – Down Payment Deficiencies
When a buyer decides it’s time to save a down payment to purchase a home they either fulfill that
commitment or they don’t. The timeline for buying a home is typically flexible and there is no real
consequence if they don’t since the sole responsibility for saving the down payment rests with the buyer.
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Email: [email protected] This isn’t usually the case in a rent-to-own. The Rent-to-Own buyer must have a minimum down payment
saved within a specified amount of time. Under the terms of a Rent-to-Own agreement a specified amount
is set aside every month as part of a forced savings plan. This amount is eventually credited or rebated to
the buyer when they purchase the home from their sponsor.
A forced savings plan is an important feature of a
Rent-to-Own program since you could lose your
deposit and option credits if you are unable to
qualify for a mortgage. For this reason it is critical
that the Rent-to-Own company properly accounts
for this when preparing your success plan.
There are three factors that will impact your ability
to have enough saved for a down payment to
succeed in a Rent-to-Own program. They are:
1. Providing no, or very little, deposit up front
2. Not saving enough each month during the
lease term
3. Late payments
An upfront deposit represents the foundation of your eventual down payment to buy the home. When a
Rent-to-Own company does not require a reasonable deposit they are placing the entire responsibility for
saving an adequate down payment on the buyer. They are also positioning you to fail.
The money for the down payment must come from somewhere. If you don’t have a reasonable deposit
when you begin the only other place to account for it is through a higher lease payment and more option
credits. For most families a rent-to-own is already an expensive alternative without having higher monthly
payments.
The next factor which will impact your down payment is whether you are given enough option credits each
month to build a sufficient down payment. This requires that the Rent-to-Own company first develop a
plan that specifically outlines how much you will need to save and then determine the monthly credits
required to reach this.
The size of the down payment may affect whether or not you are approved for a mortgage. Canadian
buyers for instance must have a minimum down payment of 5% to qualify for mandatory mortgage
insurance on high loan-to-value mortgages. Closing costs must also be considered which raises the
minimum a buyer will need to have saved to approximately 7%.
We suggest using the second rule in our Rule of 3s – 3% minimum deposit. You calculate this by
multiplying your budget price – or 3 X your Gross Household Income (the first rule in our Rule of 3s) – by
3%. This is only a minimum deposit. More is common and is always better, especially where a cheaper
home is chosen to feel comfortable with the monthly payments.
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Email: [email protected] Late or missed payments are the last factor which will detrimentally affect your ability to save a large
enough down payment. A late payment may result in you losing the option credits for that month. Should
this occur two or three times a year then you may you not have enough saved for a down payment. If you
are unable to qualify for a mortgage to buy the home as a result then you risk losing your deposit and
accumulated option credits.
Risk #7 – Market Cycles
Markets move in cycles that are influenced by factors beyond our control. The real estate market is no
exception. Interest Rates, mortgage qualification rules, inflation, employment levels, and the economy all
affect real estate markets - and ultimately prices.
This is a very important consideration in a Rent-toOwn transaction. If the price of your home does not
appreciate as expected you could end up with an
inflated option price (see Risk #3). The result is
that you may have trouble getting approved for the
mortgage you need if the appraisal does not come
back close to your option price.
As a general rule you will want to consult different
sources to determine the appreciation rates in an
area for yourself. Real estate markets are localized
so your best source will be found in neighbourhood
specific information provided by a realtor in the
area you plan on living.
Risk #8 – Poor Credit
One attractive feature of the Rent-to-Own solution is the time it allows a buyer to repair their credit before
applying for another mortgage. Time is essential to being able to repair your credit, especially after a
bankruptcy or consumer proposal. This is the primary reason why accelerated Rent-to-Own terms are
destined to fail when credit repair is also required (see Risk #2).
If you are still unable to qualify for mortgage financing to buy the home at the end of your Rent-to-Own
term you again risk losing your down payment and any accumulated option credits. It is important that the
success plan a Rent-to-Own company creates for you not only includes credit repair, but makes it a
mandatory prerequisite for acceptance into their program when a bankruptcy or consumer proposal is
involved.
Credit repair is a time consuming process that involves many variables. This makes it difficult to predict
how quickly your credit will improve and which items will ultimately be removed. Yes, credit repair will cost
extra, but it will likely cost much more in the long run if you are unable to qualify for a mortgage at the end
of your lease term.
A simple solution to protecting your down payment is to ensure that the Rent-to-Own agreement includes
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Email: [email protected] a monthly or yearly roll-over. While your purchase price may increase, this will provide you with extra time
at the end of the term in the event you still can’t qualify.
Risk #9 – Change in Sponsor’s Circumstances
All the above risks may be difficult to identify to an untrained buyer or casual observer. There is one final
risk that remains and because it hides in plain sight it is often the most difficult to recognize – Your
Sponsor.
This may come as a surprise. After all, how can the same person that is here to help you, willing to invest
their own money in you, and risk their personal credit for you, also be a risk? The answer is simple –
they’re human too. And then there’s Murphy.
When Murphy strikes it is almost always without
warning. Remember that if anything can go wrong it
will. Even for your sponsor. If they experience a
significant life event such as divorce, bankruptcy, or
death, then like it or not, there is the possibility of
any one of these also affecting your Rent-to-Own
program.
There is also the possibility that a sponsor may not
honour their end of the agreement. Either way, the
truth is that litigation may be required in order to
protect your option to purchase the home.
Fortunately a Rent-to-Own Agreement that has
previously been reviewed by your lawyer provides
you with options in resolving your dispute, not the
least of which is clouding title by registering your
interest in the property for example.
Many of the risks that we have discussed are not unique to Rent-to-Own solutions. Although they are
similar to those you would encounter as a regular buyer seeking a traditional mortgage it is still important
that you know that there are risks and understand them before diving into a Rent-to-Own program.
A competent Rent-to-Own provider will not be afraid of talking about all of the risks in the program with
you. They should also insist that you get independent legal advice before signing the agreements they
give you. These are just two of the traits that you will want to look for in a Rent-to-own Provider
Selecting the Right Rent-to-Own Provider
We have outlined a number of risks you should expect to encounter that could very well prevent a Rentto-own transaction from being the win-win strategy it is supposed to be. Choosing the right provider is a
very important decision in ensuring that this alternative lending solution delivers the ultimate result for
your family – being able to buy a home.
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Email: [email protected] Here are our top 10 suggestions in selecting the right company:
1. Select a company that will work within your budget while keeping
your GDS ratio below 32%. Do not let a company stretch your
budget. This is a red flag!
2. Remember our Rule of 3s - 3 X your Gross Household Income,
3% minimum deposit, 3 year term.
3. Rent-to-Own companies who are realistic with their lease terms
usually have your best interests at heart. They must recognize the
importance of time in overcoming the obstacles that prevented
you from getting a mortgage and conservative in determining how
much time is needed.
4. An experienced company should be able recommend a Rent-toOwn friendly Realtor who is able to verify a realistic option price
based on historical appreciation rates your area.
5. Give preference to those companies that always require the
completion of a home inspection as a routine part of their Rent-toOwn process.
6. Only work with those companies that insist upon you obtaining
independent legal advice before signing any agreements. This is
another red flag when you aren’t given an opportunity to do so.
7. Choose a Rent-to-Own provider which offers an in-house credit
repair program. This is a clear indication of how seriously they
regard your success, and ultimately their own.
8. Request testimonials from the Rent-to-Own company to verify that
their clients are satisfied. Privacy laws may prevent them from
disclosing client information but it never hurts to ask.
9. Ensure that their Rent-to-Own agreement has some flexibility by
providing a roll-over term which allows extra time at the end of the
term in the event you can’t qualify.
10. Trust your instincts.
Remember these 10 tips when you’re entrusting a Rent-to-Own company to prepare your plan, secure
your sponsor, and position you to prosper. Companies that meet these criteria will steer you around the
scorpions who are more interested in profiting from your peril than they are in your financial success. By
combining these tips with knowledge of the 9 risks we’ve just shared you are well equipped to make an
intelligent decision when considering this alternative solution to home ownership.
Take the first step towards becoming a home owner sooner by applying for our Home Ownership
Purchasing Education (H.O.P.E) - Click Here and Apply today!
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