Few investment strategies are as misunderstood as rent-to-own. The complexity and length of most rent-to-own agreements can be enough to get investors out of their comfort zone , while others have outdated notions about the operators, the quality of the tenant buyers and the overall viability of rent-to-own itself.
As co-founder of Homeowners Now, Canada’s leading rent-to-own company, Dale Monette has fielded every conceivable question about the industry, educating investors about the remarkable returns on offer, and altering their perceptions about a strategy too few of them have fully investigated. CREW asked Monette to help dispel three of the most commonly held myths around rent-to-own.
1. Rent-to-own tenant buyers are too fiscally irresponsible or not trustworthy enough to to secure financing from a lender.
This misconception may provide the greatest barrier between investors and the sizeable returns offered by rent-to-own transactions. Rent-to-own clients are often assumed to be desperately poor or living on the margins of society, but at a time when more Canadians than ever are struggling to find financing, this antiquated notion just doesn’t hold up to scrutiny.
“Most of the tenant buyers that join our program are families, new arrivals or divorcees who have a ‘lock-up’ period for their assets and purchasing power,” says Monette. “Whatever their situation, our typical buyers have saved a considerable amount of deposit money – the average for our clients is $16,000 – but for a combination of unique of reasons they are just shy of being able to purchase the home they require. Across our portfolio, the average dual income family earns an average of $111,000, so these are not desperate people. But they don’t want to rent, they don’t want to move and they’re ready to give their life savings in order to buy a home for their families.”
Monette admits that some applicants do fall into the stereotypical “credit mess” category, but adds that Homeowners Now’s 29-point screening process has proven effective in finding the best candidates for homeownership.
“We focus on the lowest risk, highest quality clients that we can find.”
2. Rent-to-own is an unregulated industry, which leads to inconsistent rules, legal uncertainties and a slew of potential problems.
Most of us have seen a photocopied sheet of paper, hastily taped to a lamp post and flapping in the wind, advertising rent-to-own opportunities. Such “advertisements” rightfully raise questions about that particular operator and his ability to provide the legal and fiscal stability a successful rent-to-own transaction requires. They also raise legitimate questions about the lack of standardization typically seen across the industry.
“There are probably thousands of mom-and-pop investors who do one or two rent-to-own deals a year – maybe only one or two deals in total – who might not have legitimate documentation, who might deal in handshakes, and who might take the tenant buyer’s deposit,” Monette says. “These small operations inevitably suffer from a lack consistency and a lack of sophistication.”
Monette encourages investors worried about inconsistencies across the space to ensure any company they partner with belongs to both CAROP, the Canadian Association of Rent-to-Own Professionals, and the Better Business Bureau. Monette, who was recently elected CAROP’s Vice-President of Finance, says being recognized by both organizations, as Homeowners Now is, ensures a company’s adherence to legal standards and its use of certified professionals.
“Rent-to-own is not the wild west it once was,” he says. “There are organizations out there dedicated to holding rent-to-own operators to high standards of professionalism. CAROP and BBB bring a level of accountability to the space that has had an undeniably positive impact.”
3. Most rent-to-own transactions fail.
As one of the leaders of a company with a 100% success rate, Monette knows why so many of his competitors’ deals fall through. It often comes down to a few simple words.
“Most other operators use what’s called an Option to Purchase agreement. It’s quite standard, but it has a lot of risks inherent for the investor and the operator.” Monette explains that, because it’s an option, tenant buyers can actually demand their deposit back if they don’t purchase the house, thereby torpedoing an investor’s returns.
Monette says Homeowners Now requires their tenant buyers to sign a Deferred Purchase agreement, which legally obliges them to either purchase the house at the end of the lease term or lose their deposit.
“We want to show the tenant buyers that there is risk involved. We find that they are more motivated and more engaged in the program when they’re compelled to buy. It helps simplifies things, too, which is another benefit to investors.”
By addressing the rent-to-own sector’s biggest failings, Homeowners Now has created some of its greatest success stories.
Source: Canadian Real Estate Wealth – Mar 13, 2018