RENT TO OWN
With strict approval guidelines and lenders tightening their belts, it's becoming increasingly more difficult to get clients approved. These days, those with high income, those new to Canada, and even entrepreneurs feel the wrath of the stringent financing qualifications.
Do these clients deserve to fall through the cracks,while being destined to paying rent to landlords for years to come. leaving you with nothing to show for your efforts?
Rent to Own May Be Your Solution!
If the banks have turned you down for these reasons:
- Credit concerns
- Length of Employment
- Down payment worries
Rent to own is also commonly referred to as Lease to own or lease option. The terms are interchangeable. Rent to own is a lease agreement between the owner of the property (the lessor who is a investor) and the tenant owner (the lessee) with an offer to purchase in advance. Leases are agreed upon by both parties and the lease payments are paid monthly over the lease term generally 3 to 5 years depending on the credit issues.
What are option credits and security deposits?
Option Credits...
A set portion of the lease (20%) is credited towards the down payment and later used to purchase the home at the end of the lease term. This is accomplished through the monthly option credits.
Security Deposit...
The tenant-owner is required to bring in a minimumsecurity deposit of 5% to 10% and in some cases even more, which is held by the lessor with no obligation to pay interest.
So who buys the house?
There are two sides to the program. The Rent to Own company sits in the middle, brokering our investors on one corner and our eager tenant owners on the other. We assist in helping you, find that dream home you are looking for. We then tap into a database and offer the deal to one of our savvy investors. The investor that scoops up the deal then purchases the home in question and the lease to own agreement then kicks in.
What happens when the lease is up?
The lessee has the option to fulfill the purchase at the end of the term by making one more option payment before he lease ends. A sale or transfer price is set in advance and the appreciation rates for the area is based on market trends that can range from 2.5% to 5% per annum. The lessee also has the option to walk away from the purchase before the end of the lease without legal liability or penalty. But doing so would mean the forfeiting of all monthly credits accumulated and the entire security deposit to the lessee as well as the initial deposit to offset the sale of the home afterwards.
Do we charge a fee?
- We do not charge a huge lender fee like a private mortgage (3-10%) or charge an insurance premium.
- We do charge a $500 activation fee for all purchases and re-finance buy back deals and payable once you approve the program and is 100% refundable if the deals does not go through. You can request a refund within 5 business days in case you change your mind.
- On re-finance buy backs, an additional $500 is required once the offer is accepted and this amount will be credited towards the security deposit.
- Low beacon score due to late payments, collections writs and judgment.
- Absence of established credit (beacon R or I).
- Bankruptcy and consumer proposal in or out.
- Non-refinancible mortgage, or deals that are pushed into pre-power of sale. (Re-fi buy backs)
- Business for self guidelines have changed with CMHC .
- Current income shy to qualify under TDS rules, but expect future income to rise significantly higher due to the nature of the job
Income is King!
They need to have a sufficient income to be able to cover the monthly rent plus the monthly option credits.
Things that can decline a deal
- Low security deposit; a minimum deposit of 5% is accepted except in some cases we are now looking for more such as 10% due to employment, total income, location or condition of property. (Note: deposits can go up due to employment, property location, credit issue and length of term.)
- Property values priced beyond what the lessee could afford in payments resulting in financial hardship.
- Location is too rural and not marketable if it is in the middle of no where or the zoning is not residential.
- Property is too specialized like cottages, mobile homes, leased and native lands.
- Property is in disrepair with roofing, electrical, plumbing, heating and foundational issues or outstanding work orders.
- Type of employment is too unstable, seasonal, or just too new at the job. Our minimum requirement is 6 months.
FAQ's
What happens if the value of the home is lower than the future purchase price, or what happens if it is higher?
We make every effort to research the area your client has chosen to live. We use resale stats of homes sold over the last 12 months and we try to be as conservative as possible and work with appreciations between 2 to 5% throughout Canada. In most cases the home value is coming in close to what we predict, but deals that matured in the past with higher appreciation value that got reduced due to market corrections, we were able to extend the lease so the house value meets the target price within 3 to 4 months. In some cases we also ordered multiple appraisals, which both parties paid, and averaged out the price and transacted on that with the approval of the investor. House values can also be higher in strong markets such as Winnipeg, St John’s where appreciation is greater than our maximum 5% leaving equity to the tenant.
You find a house, can I use the existing Realtor?
Of course you can, we do not restrict which Realtor they or you prefer to use. We just ask that the Realtor contact us so we can pass along the procedural manual so they understand the process. Many mortgage agents partner up with several Realtor so they can refer clients back and forth for this rent to own program.
I tried everything, my home is in a power of sale and the lender's lawyer are about to take the house, can you do anything?
A number of these deals have come in, a portion we can help and a portion we can't due to time. These transactions are quite complicated since we are using a third party to seek financing, making the whole process more complicated than a normal mortgage deal. We require 4 weeks to transact on a deal from doing due diligence, ordering appraisal, commitment and closing which takes that long when lenders are requiring more time to process deals. If you been locked out, you will have to know if there is enough equity left in the deal before the per Diem cost erodes away the equity. In many cases lawyers are not willing to extend without a firm offer and our investor will not firm until they know the house is prime, and the value comes in as expected.
If you want to buy a home with a higher value, if you rent out the basement, can we qualify you for more?
We do take in rental income and use 50% of rent to add to gross income. Our first concern is you may not have any property management experience and the rental unit might take longer to fill causing financial hardship, which we don’t want. We would consider rental income on a case by case basis, not to qualify, but to strengthen the deal so the file would be filled with one of our investor.
My client only has 3% for down payment, can he qualify for the program?
Our minimum deposit is 5% that can go up to 10% depending on the file and location of the property. With less down, our investor base will be less willing to accept when other files are producing more. Besides having a lower down payment would result in disastrous results since we know lenders are requiring greater than 5% when applying for finance. We would consider a lower down payment if we have something stronger such as income and job to offset risk.
You have researched many rent or lease to own companies, what makes yours any different than the others?
We pride ourselves as being able to partner with real estate investment professionals that are equipped with real estate and financial backgrounds. When we started this business, we saw how many rent/lease to own companies sprout out charging low deposits of 2-3% and auto-approving anyone that breath. These companies do not address the credit rehabilitation and only offer secured credit cards and the clients are left on their own only to result in high rate of defaults. This is why many Realtor hate to refer clients into this program since many of these companies produce disappointing results. Our down payment base is much higher than the rest allowing more down payment to be accrued during our program and a greater chance of getting an approval from a bank lender when the file going back to the agent.
What happens if your beacon score is still too low after the term?
That can always happen since we cannot control emergencies or bad financial choices. There were incidences in the past, the client score happened to have been 629 and the lender wanted higher. We parked the file and extended the lease for 3 more months and transacted in spring after she paid off her cards and kept the bureau clean for 3 months. The score rose to 666 and enough to be accepted.
Can my client trade in the house if they find it not suitable for their needs?
This is why we provide the buyers selection program so they can choose the house that suits the needs of the family. This is not a product from a department store they can return for a store credit. In all cases the house was purchased specifically for their needs and that decision should be firm.
CMHC says the security deposit must be refundable in order to qualify as a lease to own deal?
In most cases lease to own deals are originated with inventory since most of these companies are investors, Realtors, property managers that are sitting on a house they want to convert to a lease to own. When we are back filling (filling existing home), the security deposit is 100% refundable if the client wishes to default, the monthly credit is forfeited. When it comes to new acquisitions, the security is deemed refundable minus any cost to liquidate the property since it was bought specifically for you.
You find the payment high and worry about not being able to afford the payments?
Our lease rates are based on 30% GDSR, if you can't afford it, we have a problem. Also you must remember that a portion (20%) will be credited back as a forced savings towards a much required down payment in the future. When we present the figures upfront, every agent and client can come back to us requesting lower figures. We can do this by adjusting the lease term longer so the start up cost is spread over more years, resulting in a lower lease rate. We can also lower the monthly lease rate if the deposit is boosted higher.
If you decide to leave the program early, can you be refunded all the monthly credit and initial down payment?
You must keep in mind that you were pre-approved for a purchase amount, you picked the house, our investor took financing in order for them to move in. There are closing costs, mortgage discharge cost, and none of this can be reimbursed if the tenant one day decides to leave, which is not fair to our investor who made an effort to help the family. The cost to get out of a deal could easily run into the 10's of thousands or they can clean up the house and we perform a back fill (filling existing home with a new tenant) for a new tenant. Our policy is to refund any security deposit less cost to dispose of the property.
Is this program a sure thing for my client?
The only thing for sure is death and taxes, we do aim to transact on every deal we approve. Sometimes there can be issues with the house where the lender refuses to lend on it due to the condition. Sometimes we are declining deals because the income disclosed on the application is coming up short. There are occasions where our investor did not like the town, house or client and they all turned their backs to the deal because it was weak. I would state roughly about 90% of applications are approved. We are doing our best and there is always a remote chance that it will not work.
Pre Qualification
In order for you to identify if you are a suitable candidates for the Rent-To-Own Program three basic formulas can be used to save you time, they will help calculate the maximum house value in conjunction with your income and a very rough estimated lease payment.
Purchase Price: Total Household Income x (3) = Maximum House Purchase *
* We understand mortgage agents can leverage much higher such as 4 to 5 times income in a normal mortgage deal, but clienst have bruised credit and keeping within your budget is imperative till we can demonstrate yor improved credit.
Lease Payment House Value x (.0085)= Maximum Lease Payment Allowed **
** The lease rate indicated above, (.0085), is subject to shift between .007 to .013% depending on the purchase price and size of down payment. The rate of .0085% was based on a purchase price of $200,000 with 10% down. The rental term can range from 3 to 5 years and is based on the time required to rebuild credit to an acceptable level and if a proposal has to be made, for 2 year deals simply add 8%.
GDSR (30%) Gross Annual Income/12 Months X (.30) = Maximum Lease Payment
These formulas are supposed to be used specifically, and never deviated from in order to manage your expectations and in order to provide structure to the screening process. We want to be clear and not waste time with an applicant who doesn't understand why they can't purchase a home they can’t afford, or be financed for. We understand a person with excellent credit can qualify for much more, but generally this program sways to those people who have bruised credit and we need to be more conservative for their own sake.
Ideal Rent-To-Own applicants are people who have strong income through either full time employment, are self-employed, have commission based income, contract positions and have the ability to provide a substantial down payment in the rage of 5 to 15%. We will not turn away applicants with poor credit, applicants who have dealt with bankruptcy or consumer proposal or new immigrants or applicants who are dealing with a power of sale and are ready to lose their home.
Guidelines
Use the guidelines below to help you determine whether your deal qualifies or not.
Overall Guidelines...
Appraisals: Required for all deals if the client is currently living in the subject property to validate market value, which they are responsible for. If this is a private landlord sale (FSBO), appraisal is also mandatory and required upfront or at least on order. We currently accept appraisals from Brokerworx, Reliable Appraisals, and NAS and must be within 60 days from date of application. Reports must show home has more than 40 years economic life.Appreciation: Every property we transact go up in value every year. We try to do our best in determining what the appreciation value are per year through industry statistics such as Canadian Real Estate Magazine and comps we can find in the area. We tend to work in the range of 2 to 5% per year. Area's that are flat or declined will be rejected and your client will be asked to find another home.
Fees: A $500 Activation fee is now charged on all approved deals, this is refundable within 5 business days or if the transaction doesn't take place on new purchases. On re-finance buy backs, additional $500 is requested upon signing of the offer and to be used as initial deposit to be rolled into the security deposit.
Home Inspection: Required for all deals except for new homes or homes under 6 month old, houses that are not prime will be declined regardless if the tenant is looking for a fixer upper or considers themselves a handyman.
Ineligible Properties: Commercial or mix use, agriculture, industrial, island, cottage, recreational or homes that are not prime or in good repair. We will not take homes with roof, electrical, heating, plumbing, basement foundation issues or homes that are not kept clean and run down.
Price of Property: We cap at $300,000 in all major cities and towns and minimum is $60,000. Higher values may be approved if the file is strong enough, but strictly on a case to case basis.
Types of Property:
Resale: Single family homes with or without basement apartments, or up to 4 units (all rental component must be legal and retrofit). The square footage should be consistent for the type of homes in the area and must be supported by comparable and located within 45km of population of 5,000 or more. These houses should be listed on MLS, we will consider private sale (FSBO) only with an appraisal upfront or at least on order. (We are not entertaining any deals in Quebec until further notice).New purchases: there is GST and HST which adds up to 13% making it near impossible to execute on new purchases for now besides Atlantic Canada.
Note: New purchases are exempt unless specified.
Income Guidelines...
Employment Income: Fully verifiable Income supported by job letter, pay stubs, T4 and NOA for back taxes. We will require any documents if they are in a consumer proposal or bankruptcy program. Total household income must be greater than $45,000 per year. Any fixed income such as UIC, ODSP, CTC, cannot exceed 30% of total income. Employment must be minimum of 6 months with current employer, and not on probation.Rental Income: We allow client to collect any rental income from tenants if there are additional legal units or basement apartments, we use 50% rental offset when adding to gross income but the emphasis will be on the tenants income to debt service the lease on their own in case of vacancy issues.
Stated Income: We allow it as long as it makes sense and if they can afford the payment. Please note for stated income, a higher lease payment and 10% deposit is required. To compensate for the higher cost, we also boost the monthly credit so we can accumulate a higher down in the future to meet the higher required down payment for this program. We like to see a minimum of 15% for all business for self applicants. We require business verification and sometimes financial statements, 2 years of T-1 Generals gross up by 15% on line 150. Please note with CMHC changed rules in this sector, we strong suggest agents walk their client through the CMHC BFS program to ensure they can meet the required income to qualify or they can be in default when the lease expires.
Debt Ratio:
GDS: Gross Debt Service Ratio (30%) - Because all of our leases have a saving component of (20 – 25%) through our monthly option credit, we stand firm on 30% GDS.TDS: Total Debt Service Ratio (40%) - Most of the applicants that apply do not have credit or all of their trade lines are in collections. In many case we have to plan for a 3 to 5 year consumer proposal in order to eliminate the debt before completing our program. If the client requires a program, this can affect the purchase price of their home in case the proposal payments
Lease Lengths...
Term: Based on length of time for credit rebuilders to perform a complete credit restoration as well as the required time to accumulate the required down payment to satisfy CMHC down payment guidelines. Leases are generally 3 years or more. For deals requiring 2 years, a 8% premium surcharge is added to all 3 year figures.Early Discharge: We do not offer this at this moment since every deal is timed with the credit rebuilding program. Any early exit out of our program may result in disastrous result since the tenant might not possible qualify without the full credit restoration. Plus disclosure for the CMHC Flex Down product may be an issue since down payment can no longer be proven from the occupancy agreement since the figures no longer add up.
Credit Issues...
Low Credit Score: We take all credit types regardless of how bad or absence of credit. Since the tenants all go through a credit rebuilding service, they all get a brand new start. Terms starts at 2 years and up according to the required rebuilding time.High Debt Load: Depending on the income and the amount of debt, we can provide a debt repayment schedule, prepare a consumer proposal and even place your client through a bankruptcy program.
Timelines...
New Purchases: Transaction times are generally about 6 weeks to complete from offer stage to closing. But count on 4 weeks from being file complete.Refinance Buy-Back: Generally about 4 weeks to complete if no issues with appraisal and home inspection from being file complete.
Lease Rates...
Rate Matrix based on a 3 year lease program, for 2 year programs, add additional 8% to the lease payment. 2 years is the minimum term available under our leasing program.|
Price Range $60,000 - $110,000 $110,000 - $170,000 $170,000 - $220,000 $220,000 + |
5% .013% .011% .0095% .0085% |
10% .011% .0095% .0085% .0075% |
15% .0095% .0085% .0080% .0070% |
Example on how to calculate payment
On a $89,000 purchase
5% down $89,000 x .013=$1,157.00 per month which includes $231.40 monthly credit
10% down $89,000 x .011=$979.00 per month
15% down $89,000 x .0095=$845.50 per month
$249,000 re-fi, 10% equity. Payment is $249,000 x.0075 =$1,867.50 per month, including $373.50 in savings
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