Guest Post: Intro to Rent-to-Own in the United States, Including Investor Lawyer’s Thoughts on the Canadian Equivalent.
Rent-to-Own (sometimes called lease options) is a way of buying a home without taking on a mortgage, and versions of it have a worldwide presence. Our friends in the American real estate investing community have been working with Rent-to-Own for years. Now, Rent-to-Own is getting more attention in Canada as a Creative Investing Strategy. Furthermore, some Canadians are very interested in purchasing American properties using Rent-to-Own.
Today we are featuring a guest blog post from Ashley Lipman (see below), outreach manager for a Dallas, Texas-based rentals company called The Urban Avenue. She provides a short summary of Rent-to-Own in the USA, upon which I’d like to share some thoughts for my Canadian readers.
Now, I’m a lawyer, and my lawyerly caution makes me say that this article is very much on the optimistic side of Rent-to-Own. It’s good to look on the bright side, but markets do not always go up, tenants are not always able to qualify for a mortgage, and circumstances change. That being said, Rent-to-Own is more common in the States, which can make it easier; real estate agents, banks, and lawyers will be more familiar with it.
If Ashley’s very brief intro to American Rent-to-Own has you thinking of dipping your toe in the US market, you need to read and learn a lot more about it, both on a national basis and as it specifically operates in any particular State. You also need an American real estate agent and attorney, both experienced in the Rent-to-Own strategy.
In my previous post on the mainstreaming of Creative Strategies for real estate investing in Canada, I observed RECA (Real Estate Council of Alberta) was instructing their members on the existence of Seller Financing. They have good reason to do so. In Canada generally, seven major tightenings and restrictions to mortgage qualification rules since 2007 have made it tough for many people to get a mortgage.
Seller Financing is now indeed much more important to both buyers and sellers. For buyers, many cannot get a mortgage through normal lending channels. For sellers, those tightened mortgage rules have diminished the pool of buyers and lowered prices.
Like Seller Financing, Rent-to-Own is another Creative Strategy suitable to tougher financial times, and is also gaining momentum in Canada. When buyers want to buy their dream home, they are not only stymied by much tougher mortgage rules, but also by other circumstances. Common examples of circumstances that prevent someone who wants to buy a home from doing so are: insufficient down payment, divorce dropping income, new Canadian, new business, and bad (but repairable) credit.
You know that Rent-to-Own is going mainstream when it is suggested as a solution to Toronto’s seemingly never-ending housing crisis. Locally, when a major Edmonton developer started marketing a new Rent-to-Own high-rise project under the “OpTown” concept (Option to Own), the real estate community, usually a pretty conservative bunch, had to sit up and take notice.
Of course, I’ve been onto Creative Strategies for a while, so take a look at my previous blog posts and podcasts about Rent-to-Own in Canada: https://barrymcguire.ca/?s=rent-to-own
If you’d like to learn how to use Rent-to-Own Creative Strategies in Canada, register for my upcoming Rapid Cash Program!
Renting: The First Steps Toward Home Ownership
by Ashley Lipman
Are you tired of paying rent month after month, but have nothing to show for the payments you have been for years? For decades, it has been an American dream to own a home – for some people, it is a symbol of stability and financial success. In addition, you are probably bombarded by messages that say that owning a home is a great investment.
Unfortunately, homeownership is not an easy process for so many people. Mortgage lending is strict and requires people to save up for a down payment. In addition, you require having a great credit score and showing that you are constantly in employment.
Gladly, your dreams of homeownership are not yet over. Rent to own, lease with option to buy, or lease to own all refer to a popular solution today. Essentially, you enter into a purchase arrangement where you agree to lease a home for a specified amount of time before you can purchase it.
How Rent to Own Works
Rent to own features more moving parts than your traditional mortgage agreement, but it is not difficult to understand. Once you find a rent to own property you like, you and the seller agree on monthly rental fee (rent credit), time you have before purchasing, and the property’s purchase price.
You have the option of paying an upfront fee, which is three to five percent, and the amount is credited to the home’s purchase price. For instance, if the rent is $1,500, your agreement may require you to pay $1,750 where $250 is set aside as the monthly rent credit. This strategy towards home ownership brings you plenty of benefits.
Minimum On-Hand Cash Required
Instead of making a single down payment (around 20 percent of the home’s value), you only pay a onetime option-to-buy fee. The fee is usually around three to five percent of the purchase price.
Purchase Price is Locked-In
As you sign the rent to own agreement, you lock into the agreed purchase price. In case the property value appreciates during the tenure of the lease, a seller still sells it to you at the agreed price. This means that you can benefit from a huge discount in a growing market like apartments in downtown Dallas, TX.
Build Equity Fast
One of the biggest advantages of renting to own is that you can build equity without putting down a huge down payment. In addition, you do not need to have credit before qualifying for your home loan. In case the home’s value increases, you immediately earn equity on finalizing the purchase.
For instance, a home valued at $180,000 today could be appraised at $210,000 within two years during the duration of your option to purchase. In the process, you have a built-up equity of $30,000. In addition, this is on top of the rent credit you have accumulated and upfront option fee.
Rent Money Contributes to Homeownership
In typical cases, between $100 and $500 of your rent money is considered as the down payment for the home. In addition, the money also caters for items such as closing costs.
Postpone Closing Costs
When purchasing a $210,000 home, the closing costs you would have to bear are about $6,000. The costs are part of actually purchasing the home you seek. However, in your rent to own agreement process, you earn more time to save some cash for covering all the fees.
Opportunity to Improve Your Credit Rating
Concisely, the higher your credit score, the lower interest rate you are likely to pay. In such cases, a higher credit score means that you are less of a risk for any lender.
Waiting to purchase your home offers you an excellent opportunity to improve on your credit score. In fact, you can move the score from fair to excellent, helping you save thousands of dollars over the lifetime of a 30-year mortgage – with lower interest rates.
Renting to own is a great arrangement compared to buying your dream home via conventional methods like mortgage. This type of homeownership brings you plenty of benefits you may not have considered before. However, it is important that you carry out your due diligence and locate a licensed, reputable agent to help you in the process.