Rent To Own II

Rent To Own II Shaking hands on it. Original photo at www.rentcredit.net

A revisited idea

Although the jury is still out regarding a possible return to a Buyer's Market, it does seem likely that a few sellers and/or their listing agents may begin to resurrect the Rent To Own concept. I do have some reservations about the wisdom of it from a buyer's point of view, but it did come into being in the 1990s when, as it were, you couldn't give the stuff away.

Things are by no means as serious as they were then, which was when many people complained about what they called the Mulroney Error. However, some creativity was called for in order to sell houses at prices that had suddenly become unobtainable. And, given the mutterings (which, as I said last month, are more vocal in the US than here in Canada) about listings showing signs of taking much longer to sell than they did only a couple of months ago, the RTO idea may resurface.

In all fairness to those sellers and listing agents who see some sense in it, let me therefore run through its basic principles, even though I'll then attempt to put it into some perspective.

There are, in fact, no absolute rules, but the fundamentals are as follows.

1. The buyer and seller agree on a price that either reflects today's value or what the property is probably going to be worth at the end of a rent/lease term that they agree upon -- which can be as short or as long a period as they mutually decide.

2. The buyer agrees to pay the seller either a market rent or an amount that exceeds this figure.

3. In the first case, the buyer simply acts as a tenant who undertakes to buy at the agreed upon future date and, in the interim, saves up a downpayment that will be sufficient to qualify for a mortgage.

4. In the second case, the buyer pays the seller an agreed upon additional amount that will be treated as an accumulating downpayment.

5. Either way, the buyer and seller draw up and sign an Agreement that spells the details out -- and there's no real reason why the standard Agreement of Purchase and Sale form cannot be used to serve this purpose.

And the good news is ....

It would be unjust of me to say that there's no merit in an RTO agreement. There are benefits to both sides of the transaction.

From a seller's point of view, it increases the likelihood of a sale because it could ensue from someone who simply cannot obtain a mortgage despite their best efforts to get one. The more the merrier applies to potential buyers as much as to anything else.

The real benefit to the seller, though, is that they are more likely to get their asking price -- or, of course, an anticipated future higher one -- and, in addition, some months of rent and/or interest on top of it.

At the same time, some buyers have no chance of getting a mortgage (at least not for a year or so from now), and the RTO idea then enables them to become homeowners without the need for one. Rather than simply being a tenant with, in effect, no guarantee of remaining in residence (because the owner can at any time sell the property to someone who would have the right to occupy it themselves), there's a certainty of being able to stay put and, in due time, to take ownership over.

Although there's also the bad news ....

The real problem with the Rent To Own idea has its roots in the way it's viewed by the mortgage people -- the very ones who are showing no interest in lending anything to the potential buyer at the present time.

When deals of this kind emerged during the 1990s market slump, many sellers and buyers learned too late that things weren't, as it were, worth the paper they were (not) written on. More exactly, CMHC came up with an unwillingness to believe the arrangements that had been made by the two parties to a transaction. They wanted written proof (which could not be backdated but had to have been created at the start of the rental term) and, in addition, clear cut documentation of the rent and additional payments received by the seller. All told, the accumulated downpayment wasn't too readily, if at all, seen and accepted as such.

Whether this somewhat limited and/or jaundiced thinking was justified or not, the reality was that many -- if not most -- RTO would-be purchasers were not approved for a mortgage at the end of their rental/lease term.

How does the saying go: put not your trust in princes? Well, it can often apply to the bureaucrats as well, especially if no one gets their prior approval of an idea -- which no one in the real estate business really took the trouble to do at the time.

So where does it all leave us?

Despite everything, all isn't lost as far as a buyer with a poor credit history is concerned.

For instance, the mortgage business has become decidedly more open minded than it was. In fact, there are now lenders who'll finance purchases without a downpayment and those who'll provide a mortgage based on a self-declared income. In other words, perfect credit is no longer an absolute requirement. Instead, there's what can be considered a long overdue recognition that a demonstrated ability to make monthly payments is as good a qualification as any. After all, how do tenants remain living where they do is if it isn't because they regularly pay their rent on time?

Nevertheless, the most likely source of these non-traditional ways of financing a purchase is a mortgage broker. Despite their more relaxed approach to things, many lending institutions will still fall back on some fine print to turn a mortgage application down.

Otherwise, though, there are investors who specialize in buying homes with the specific objective of reselling them on a Rent To Own basis. Admittedly, these people aren't easy to find and I don't know of one who has a website to generate enquiries from potential buyers. Rather, they tend to use the classified ads to make themselves known.

Even so, some scepticism is called for in dealing with them and, at the risk of sticking my neck out, I'll encourage people to contact me for a second opinion about any deal that's being offered to them.

Which is sort of where we came in, isn't it?

All told, I suppose I'm saying that the Rent To Own idea occupies a rightful niche in the marketplace. If it's done sensibly, both sides are the better for it. What's needed is the right wording, and perhaps this is one of the main features to be found when a specialized investor makes it available.

Interestingly enough, however, any softening in the current sales rates is perhaps likely to increase the response to RTO classified ad promotions rather than trigger a widespread re-emergence of the possibility in MLS listing descriptions.

In any case, there's room for creativity in the real estate business and there's no good reason why a seller and buyer can't shake hands on an RTO deal -- provided, needless to say, that they have the requisite written proof of it!

Duncan Pollock, Real Estate Broker,
427 Gate Street, Niagara-on-the-Lake,
Ontario, Canada L0S 1J0
Tel: 905-468-3154 Fax: 905-468-3812
Cellular: 905-704-9037
email: duncanpollock@sympatico.ca
Note: e-mail address changed as above on November 3 2007
website: http://www.duncanpollock.com

PS. One of my web pages provides a list of the other newsletters I've sent out. If you choose to go to it, you can click on any title to bring up its full text.
PPS. I've recently been invited and encouraged to create a second website, one that deals with my approach to the industrial, commercial, and investment real estate market. You can reach it, if you're so inclined, at http://www.iciniagara.com.