Despite our marketing materials, which I think makes it clear, I get rent 2 own applications from people with very little or nothing available for a deposit.
I respond by explaining to them that we cannot assist people without a deposit. Often, the response is to thank me for the added information, sometimes with the added note that they now know what they need to strive toward.
Occasionally, I get the opposite, like the guy who recently responded: “See, I knew this was a scam, stealing people’s deposit” (or something like that).
In fact, it’s exactly the opposite. It’s those who may not require an adequate deposit that are more likely scams.
The deposit is the necessary foundation for your anticipated success at the end. Without it, your chances to succeed are slim.
Let me explain.
There are three reasons we collect a deposit:
- At the end of the rent 2 own term you will likely need savings of at least 11% (if you’re a first-time homeowner; more if you’re not) of the value of the property that you are purchasing, in order to get a mortgage. This is based on needing a 10% down payment, and 1% for closing costs. True, 5% down mortgages still exist, but you need to be a stellar candidate to qualify for them. Rent 2 own applicants aren’t usually stellar clients (why would they be applying to rent 2 own, if they were?) If we aimed for only 5%, plus closing costs at the end of the term we would likely be setting you up for failure. That’s not what we’re about. We want, and expect, you to succeed.
So, how will you save up 11% of the value of the property during the term, in addition to paying your normal rent? A $300,000 property, for example, would require savings of $33,000, almost $1000 a month added to your rent for a three-year term. Almost everyone would find that impossible and would fail, and we’d have set you up for that by allowing you to start with nothing. Start with 5% deposit, and the monthly amount drops to $500 on top of your rent—much more possible, and more likely to succeed.
- It is true that if you abandon the process or fail to repair your circumstances so that you can qualify at the end of the term, you forfeit the deposit. Therefore, the deposit becomes a powerful incentive for you to be motivated and responsible in reaching your goal to qualify to own the home you’ve selected. We don’t want you to fail and forfeit your deposit. It is in our best interests to have happy clients and a successful program, plus we normally do better financially if you succeed than if we get stuck with your deposit—and a home we’ve got to get rid of.
- In the rare case that you should bail on the process and we get stuck with the home, at least there is enough there to pay a realtor to dump the property, likely leaving us with little or nothing, but at least that part is covered.
As has already been alluded to, the deposit is typically 5%. This seems to be a good balance point to meet all three of the above reasons for the deposit. In rare cases, where circumstances warrant, we may go a little lower (for example, if we’re confident that you can qualify for a 95% mortgage at the end). However, points 2 and 3 are still valid, so we will not go too much below that.
No reputable rent 2 own professional will do much less than that, either. If you see something advertised for significantly less, it is likely one of the following situations:
- A property developer building a whole complex, who is basically giving you terms over which to purchase the property, with the transfer of title happening after a fixed period when you (hopefully) will have paid enough down to qualify for your own mortgage. In this case your deposit will likely have been built into the profit margin of the sale in the first place. But the second reason above is lost. It is a bigger gamble for both sides.
- Unreputable types (or uninformed fly-by-nighters) who are not motivated, or perhaps knowledgeable, to set you up for success. Some of them prey on the naïve, knowing they will likely not succeed, keeping their money, then doing it all over again with another unsuspecting client. I heard of one such low-life who did it seven times in a row on the same property.
It’s those who don’t collect a proper deposit who are likely the scammers, out to steal your deposit.
I always advise: “If you see an advertised rent 2 own requiring a deposit of 3% or less, Run! You are likely being set up for failure!”
