Rent 2 own has been around for a long time but it is growing more popular as federal regulations and bank policies make it increasingly more difficult to qualify for mortgages.
But it is still not that mainstream, so there are a lot of ideas and misconceptions about rent 2 own.
We’ve encountered them, too, so I thought it prudent to put it out there—bust some of the myths of rent 2 own:
- You pay your rent, and it goes toward your home-ownership down payment. True, during the term of the deal, you are a renter and you thus pay rent, just like before. But there are two components, the basic rent and the rent credit component. The basic rent does not go toward down payment, only the additional credit component does. This is because of both CMHC rules, and the R2O provider’s need to pay their bills.
- Rent is cheaper in a rent 2 own than just renting. Absolutely not, for the same two reasons noted above. CMHC may actually void the Rent 2 Own contract if the “basic rent” is below market value. And the rent 2 own provider needs that, in any case, to pay the bills. Now, add on the credit component, and you will be paying significantly more total rent than if you were simply renting. Think of it this way: if you were to just rent anywhere else for the same period of time as the rent 2 own deal and save up your money alongside of that to buy a house at the end, you would have to save up the amount of the credit component every month anyways. With rent 2 own, you just do it inside the program, instead of on your own. It’s a forced saving account.
Of course, if you already have adequate funds, and you are doing a rent 2 own for other reasons, such as credit repair, then you will only need to pay the basic rent component, but it will still not be below market value.
- It’s an alternative financing scheme, so that you don’t need to meet bank qualifications. As a matter of fact, you do need to meet bank qualifications, but only by the end of the term. The rent 2 own provider can qualify you at a lower standard at the start of the term based on their assessment, and your commitment, that, over the term, you will improve your circumstances—credit score, down payment accumulation, job security, whatever—so that you can meet bank qualifications by the end. When you enroll in a rent 2 own, you are simply “buying time” to meet bank standards, not avoiding them, while already living in the home you will own at the end.
- You can start with no savings. Absolutely not true. By the end of the term, you will typically need to have 10% saved up for a down payment and at least another 1% for closing costs. That is a lot of money, especially in BC’s Lower Mainland, where single family homes start at about half a million dollars. Therefore, we typically require a deposit of 5% to start. Saving up the other 6+% through rental credits over the term is itself a monumental challenge for most people. To try to do the full 11+% would be impossible. Besides that, there needs to be sufficient incentive for the client to be diligent about fixing their issues to meet bank qualification by the end, plus, the provider needs enough security so that, should the tenant-buyer bail on the deal (it does happen occasionally), there is at least enough in the account to pay a realtor to dispose of the property. Why would the provider take that loss if the client bails?
- You have a piece of home ownership when you get into a rent 2 own program. No, you are simply a renter during the term of the deal. BUT, you have an option agreement that secures your right to the property. Provided you don’t violate the terms of the agreement or fully bail on the deal, you have that security; it’s just not equity during the deal.
- Rent 2 Own is a scam. Totally untrue. Although there may be the occasional bad deal or unethical operator, as there are in every profession, from doctors to realtors to lawyers, etc., most rent 2 own providers operate ethically and professionally. They see rent 2 own as a social program aimed at helping people get into home ownership who would not otherwise be able to. Qualifying for a mortgage can be complicated and trained, professional rent 2 own operators work hard to assist their clients to reach eligibility, while getting them into the home they want already at the start of the program.
But, rent 2 own is still an unregulated industry. So it is important that clients are sure their rent 2 own providers do operate professionally. Make sure that there are good legal contracts drawn up by lawyers. Be wary if your provider does not advise you to get independent legal advice, for any ethical operator would do so. Also, if they do not collect documents to support income and work history claims, they are not concerning themselves with your ability to succeed. Walk away from them.
Because the industry is not legislated, professional rent 2 own operators have formed their own self-regulating body, The Canadian Association of Rent to Own Professionals. This organization screens its member applicants for ethical and professional standards and then holds them accountable to those standards.
Deal only with rent 2 own providers who are members of CAROP. That way, you’ll be sure that the provider has your best interests at heart.
