The rent-to-own concept soared in popularity several years ago. Recently, we’ve had many rent-to-owners who entered into contracts 3-5 years ago coming to us for help.
When properly executed, this type of arrangement can be a wonderful thing. For renters who aim to become owners, yet need time to repair credit, establish consistent income or acquire a down payment, this arrangement affords them that time. For owners of properties who experience difficulties selling for the price they want, this solution allows them to earn income from quality renters with the end goal of selling for a pre-negotiated higher price than they could sell for at the time the agreement is signed. Most rent-to-own contracts come with a 3-5 year term.
The exponential increase in market values has skewed the mutual benefits of the rent-to-own arrangements that were conceived of 3+ years ago. We are seeing the effects first-hand.
For instance, in 2014, Ryan and Janine owned a home in Elora that they tried to sell for $300,000. At that time, they had trouble finding buyers, but they knew the house was in a great location and would only appreciate in value. They decided to hang onto it and rent it out, with the option to own at the end of the term. This attracted several quality renters and ultimately, they selected a young couple that needed time to build solid income and down payment. Knowing they had some ‘skin in the game’, they offered a deal whereby Mark and Mandy would rent for three years for $2000/month. Over the next 3 years, $500 from the $2000 monthly rent was to go towards their down payment. (This equates to $18,000 which is roughly 5% of the purchase price, the minimum entry to home-ownership). So, instead of purchasing the home for $355K, Mark & Mandy’s purchase price would be $337,000 in 2017.
Three years ago, a return of $55K, or 18% seemed like a great return on investment to owners Ryan and Janine. The renters, Mark and Mandy were thrilled that a portion of their monthly rent was helping them build equity and a “down payment” over the next three years.
Fast-forward to present day, 2017. Enter, the rent-to-own conundrum as we’ve never seen it. Both couples know that property values have risen exponentially. Mark and Mandy want desperately to make good on the purchase. Ryan and Janine know they can sell for more than the pre-negotiated $337K.
When renter Mark contacted us for help to execute on the purchase, the first question we asked was “where is the down payment coming from”? Apparently, the owners didn’t hold onto the down payment portion of the rent. It was not placed in trust with a lawyer, and it could not be produced to the renters. After three years of paying inflated rent, Mark and Mandy could not produce a down payment to buy this home. They were devastated at the thought of losing their home and having to try to rent elsewhere. (This is happening all too often).
We came up with a solution for Mark and Mandy, which enabled them to stay put and graduate from renters to owners. And, they happen to be sitting on over $130K in equity, as their home was appraised at $475,000!
If you or anyone you know is in a rent-to-own, or considering getting into one, contact us ASAP.