Tag Archives: first-time buyers

IN FOCUS: REAL ASSETS | REAL RETURNS Dispelling three common rent-to-own myths

 

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and length of most rent-to-own agreements can be enough to get investors out of their comfort zone , while others have outdated notions about the operators, the quality of the tenant buyers and the overall viability of rent-to-own itself.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

 

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Make your deposits carefully as they are rarely refundable: Ask Joe

Providing a deposit on a home is both a gesture of good faith and a serious commitment, Joe Richer writes.

I’m very interested in buying a certain house, but the seller wants me to fork over a really big deposit. If I change my mind, can I get my deposit back?

The short answer to your question is that, in most cases, real estate transaction deposits are not refundable.

There’s no set amount for deposits, however. If the owner’s demand for a large deposit is a major sticking point, you could ask your real estate representative to try to negotiate a lower deposit amount with the seller.

A deposit is the money you put down to secure a property that you want to purchase. Providing a deposit is both a gesture of good faith and a serious commitment. Once the seller accepts your written offer, it becomes an Agreement of Purchase and Sale (APS), which is a legally binding contract.

Once the APS is signed and the deposit is provided to the seller’s rep, attempting to renege on the APS by saying, “Sorry, I’m no longer interested” is highly inadvisable. You will almost certainly lose your deposit. The seller also might sue you for damages for any difference between the amount of your offer and the amount they accept from another buyer, along with any additional legal fees and carrying costs. You don’t want to go down that road.

Deposits are sometimes returned to would-be buyers when conditions are placed on an offer and the conditions aren’t satisfied. For instance, if you make an offer on a house on the condition of financing, but your bank won’t approve it. Or your purchase depends upon the successful sale of your current home, but it doesn’t sell in time. Or you make your purchase conditional on a home inspection and the home inspector discovers a problem that stops you from moving forward.

If you can’t go through with the purchase because your conditions haven’t been met and you want your deposit back, you’ll have to sign a release form and get the seller’s signature, too. It’s a pretty straightforward procedure and sellers will usually go along with such requests. But if the seller suspects you didn’t act in good faith, they could refuse to hand over the money.

What happens next? Well, the deposit would stay in a trust account, usually with the seller’s brokerage, and the dispute between you and the seller would become a legal matter. If you and the seller are unable to arrive at a settlement, a judge could eventually release the funds through a court order. But I’ll warn you: that can take a long time.

It’s a myth that a seller can pocket a buyer’s deposit any time a deal falls through. Cases involving deposits of $25,000 or less can be decided in small claims court, which is relatively inexpensive and easy for ordinary Ontarians to use. Cases involving larger deposits, however, are decided in Ontario’s much more formal Superior Court of Justice. Court cases can quickly become expensive, so you should carefully consider all of your options before taking this route.

If you’re serious about buying this house, I strongly recommend working closely with both a lender — to get your financial ducks in a row — and a real estate salesperson before you commit yourself to a deal and hand over a deposit.

Source: By Sat., Jan. 27, 2018

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HOW TO BUY A TORONTO CONDO IN 2018: NEW RULES + TIPS

How to Buy a Toronto Condo in 2018

Whether you’re a first-time buyer or a seasoned investor, there are new rules in 2018 that you will want to understand if you plan to buy a condo in Toronto. In this blog post we are going to explain the new rules and give you some tips to navigate them.

The 2018 condo market at a glance:

How to Buy a Toronto Condo in 2018, average price for condos

What are the new rules and changes?

 

We spoke with James Harrison, President of Mortgages.ca, to give us a full understanding of what to expect this year.

The new rules are simple:

As of January 1st, 2018, the Bank of Canada’s “Universal Stress Test” is in effect.

The buyer must now qualify for their mortgage based on the 5yr posted rate (4.99% today) or their contracted rate plus 2.00%, whichever is greater.

 

What does it mean for buyers in 2018?

 

“In my opinion, this will negatively impact one’s buying power by approximately 15-20% on average,” says James Harrison.

This stress test is an expected addition to the federal government’s measures to limit over-leveraged buyers from entering the housing market. In February of 2016, the federal government raised the minimum down payment from 5% to 10% for properties between $500,000 to $1 million. As we discussed in a previous blog post about those down payment rules and changes, the aim was to “reduce taxpayer exposure and support long-term stability.”

In October of 2016, a first round of stress tests was introduced to target insured mortgages (borrowers with less than 20% down payment). These borrowers were required to qualify at the Bank of Canada’s posted rate, which was 4.64% at the time, in hopes of creating a buffer against over-leveraged home purchases.

The newest round of stress tests is also about creating a buffer zone, but it applies to uninsured mortgages (borrowers with 20% down payment). Effectively, everyone applying for a loan through a regulated lender will now be stress tested. In a previous post, we explained in plain words how your buying power may change under the new mortgage rules.

“This will have a huge impact on some buyers but not all,” says James Harrison. “I believe this will negatively affect first time buyers as they tend to have lower incomes and also carry some debt from school. With one’s buying power negatively affected by 15 to 20% you would think this will mean prices will come down. I would be surprised if prices came down more than 5% in 2018.”

“For the well qualified buyers (those with higher incomes and little to no debt) 2018 will most likely see less competition, which could mean more of a buyer’s market. We have not seen this in a very long time in the GTA.”

“If you purchased a property prior to January 1st, 2018, you can still qualify for a new mortgage based on the old mortgage rules (with some lenders). Some top Brokers may also have lenders that can still qualify clients under the old rules (or at least using the discounted 5 fixed rate of 3.29% for example) and a 25yr amortization. This can increase one’s buying power by about 10- 15%.”

“If a buyer bought a property (same for pre-construction) prior to October 2016 (they could also qualify for an insured mortgage based on the rules prior to the first stress test for insured buyers). This is a huge benefit for some buyers of pre-construction units.”

 

What to do if you’re not approved for a mortgage under the new rules?

 

“If a buyer no longer qualifies to purchase a property they want they may have to look for a strong co-borrower to sign on to the mortgage to help increase the income and bring the debt services ratios in line.  Unfortunately, this may mean a lot more potential buyers will now be looking for a rental property, which in itself is already very challenging in Toronto.”

Alternatively, there are mortgage lenders that operate outside The Office of the Superintendent of Financial Institutions (OSFI). The ‘stress-tests’ apply only to lenders that are regulated under OSFI, such as the Big Five banks, while some second-tier banks and credit unions fall outside the new rules. These lenders have often been painted as “shadow lenders,” but they do fill a gap in the home buying process.

For buyers who don’t approve under the new mortgage stress tests, these non-regulated lenders can be a viable option and many of them offer rates competitive with top tier banks. One thing to keep in mind, however, is that non-regulated lenders are still hoping to limit risk, which means they tend to prefer borrowers with strong credit history. If your credit is weak, you may face higher rates on your mortgage. As always, it’s best to do some research.

“It is more important than ever for each and every buyer (or anyone looking for a mortgage) to connect with a very experienced Mortgage Broker. Going to your local bank branch is simply not a smart option anymore and has not been for years, but the new stress test will show this even more. A good Mortgage Broker will be able to help explain this fully and find you more options.  Even if you are a well-qualified buyer you may not qualify with your bank but you may still qualify for excellent schedule A products with another lender.  Do not give up until you speak with a good broker.”

 

Why is the government implementing these new mortgage rules?

 

“The reality of these most recent mortgage rules is that the federal government has serious concerns with the level of personal debt loads in Canada. So, they are continuously coming out with ways to help make sure everyone can truly afford the mortgage they are taking on. I personally feel this was too much, and I would not be surprised if the government is forced to pull this back within the next two to three years.”

“I am optimistic that 2018 will still be a strong year in real estate, but realistically a lot of buyers may be out of the market completely. I expect that 2018 will most likely be the year of mom and dad providing the down payment and co-signing for the mortgage as well.”

“I strongly encourage each and every buyer to contact a well-qualified and experienced mortgage broker for all of their mortgage needs, whether it is a purchase, refinance, or renewal.”

Source: Data sourced via Condos.ca on Jan 4, 2018

 

 

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What to do about the new mortgage rules

The new mortgage rules mean buyers will be able to afford to borrow 20 per cent less than under the previous rules, according to some experts.

Financial experts have some tips on how to handle the new mortgage “stress test” rules. The new mortgage rules mean buyers will be able to afford to borrow 20 per cent less than under the previous rules, according to some experts. 

Starting Jan.1, home buyers faced a new challenge in addition to rising prices and a restricted supply of available homes — a mortgage stress test designed to cool the overheated housing markets.

The test, introduced by the Office of the Superintendent of Financial Institutions (OFSI), requires the qualifying rate for an uninsured mortgage to be the greater of the Bank of Canada’s five-year benchmark rate (currently sitting at 4.99 per cent) or the rate homebuyers negotiate with the bank plus two percentage points.

That means even a buyer who negotiates a mortgage at 3 per cent will have to show they can cope with payments rising to 5 per cent.

A report by Mortgage Professionals Canada estimates the new rules mean buyers will be able to afford to borrow 20 per cent less than under the previous rules.

The Star asked financial experts for advice on how best to handle the new regime.

Article Continued Below

Clear those debts

One of the best ways to avoid the stress test derailing your home-buying plans is to first pay off any other debts you might have, said Paul Taylor, the CEO and president of Mortgage Professionals Canada.

“Any debt you are carrying will affect the mortgage you can qualify for, so you really should be doing the best to eliminate any credit card or outstanding loan debt before going to try to arrange a mortgage,” said Taylor.

Check the fine print

Some experts had urged clients who were going to hunt for a new home early in 2018 to lock down a pre-approval for a mortgage before Jan.1. Some lenders offered an exemption to the new stress test if you bought a home within 120 days of being pre-approved.

If you were pre-approved at that time with the 120-day window, you should talk to your mortgage broker to get a clear understanding of the deadline and what it will take to meet it.

According to Integrated Mortgage Planners president Dave Larock, “repeat or move-up” buyers, looking to take on bigger or pricier homes than what they currently own, will be hardest hit by the new rules. Many first-time buyers have already been putting down less than 20 per cent, forcing them to undergo another stress test that has been in place for the last year.

Make adjustments

But James Laird, the co-founder of financial comparison platform Ratehub, said he thinks all levels of buyers will have to make some adjustments to their plans.

If you can’t delay buying in order to build up a bigger downpayment, you may have to just accept that you can afford “a little bit less house” than previously. In some cases, you might even need to resort to the Bank of Mom and Dad for help qualifying for the same mortgage that you could have secured on your own earlier.

You might be further ahead saving longer to make a larger downpayment later, perhaps in time for a long-rumoured drop in house prices, Laird said.

Timing is key

Laird suggests doing your research and consulting with a mortgage broker, because there are some exceptions and a few groups of people using traditional lenders who will also not be subject to the new regulations.

For example, if you signed a contract to buy a pre-construction condo before Jan. 1 that you have yet to move into, you’ll still fall under the old rules.

And, says Larock, “If you bought prior to Jan. 1, even if you close after Jan. 1, you will be grandfathered (into the old mortgage policy), but you need a firm offer to purchase prior to Jan. 1.”

You’ll also be able to sidestep the test, says Taylor, if you nab a mortgage from an alternative lender, like a credit union that doesn’t have to apply the test because it falls outside the regulations covering banks and other traditional lenders.

But not everyone will be able to get off the hook.

If you scrambled to buy a home before the new regulations kicked in or even long before that, when your mortgage comes up for renewal, if you chose to switch lenders, you will have to qualify under the new policy, warns Taylor.

“I suspect that means a number of people’s mortgage renewals will probably be issued at slightly higher rates than they previously would have been because the bank is going to know you won’t have the ability to take your mortgage anywhere else,” he says. “That’s not going to be good news for everyone.”

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Source: TheStar.com – By Mon., Jan. 22, 2018

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Five things you need to know about Canada’s new mortgage rules

Crazy high prices are no longer the only thing keeping prospective buyers in B.C. from jumping into the real estate market or trading up for bigger or better pads.

As of Monday, all borrowers will need to pass a stress test before they are allowed to take out mortgages from federally regulated institutions such as banks, regardless of how large their downpayment. People who fail the test won’t be able to buy, and estimates have put the ratio of those who will flunk as high as one-in-five.

What is a stress test?

It’s all about subjecting prospective home purchases to a “What if?” scenario. Specifically, what would be the shape of a given buyer’s finances if interest rates were to suddenly spike.

The concept is relatively new. Insured mortgages in Canada were already subjected to such tests, but they now apply to uninsured mortgages as well, explained Samantha Gale, the CEO of the Mortgage Brokers Association of B.C.

How high is the bar? 

Potential buyers will be tested against the greater of either the Bank of Canada’s five-year benchmark rate (now 4.99 per cent) or the rate offered by a lender plus another two per cent.

“For example, if they were to get a mortgage with an interest rate of three per cent, they now need to qualify to show that they can afford five per cent,” Gale explained.

What if the bar is too high?

Those who fail the test will need to look for something cheaper on the market.

“If you were to buy a home worth $700,000 last year, this year you might only be able to afford a home worth $560,000. That’s quite a big discrepancy,” Gale said, adding that it is probably more important than ever to speak to a mortgage broker to see what the options are.

Why put buyers to a test? 

The federal government is concerned about Canadians’ debt levels, Gale said. Because it has the tools to regulate banks, it is easy for Ottawa to impose mortgage rules rather than rules on other forms of borrowing, she said.

Gale said she did not believe a housing crash like that experienced in the U.S. a decade ago is in the cards. “Generally speaking, people want to stay in their home. They find a way to pay their bills, to pay their mortgage,” she said.

Do the new rules affect you?

Quite possibly. If you are buying and need to borrow from a bank, they will, and they will also apply to anyone looking to refinance.

While those seeking to renew mortgages under existing terms will not need to re-qualify and be stress tested, those shopping around for a better rate will. “One of the challenges might be that a certain lender might not offer a competitive rate at renewal time, knowing that buyers can’t really shop around,” Gale said.

Source: Vancouver Sun- mrobinson@postmedia.com

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In 2018, these homes will sell the fastest

With reduced buying power next year, expect house hunters to scoop up everything under $500,000.

Paul D’Abruzzo, an investment advisor with Rockstar Real Estate, says that while most people will qualify for less money on their mortgages, they won’t be completely shut out of the market. They will simply adjust their demands.

“If somebody was preapproved for $500,000, their new approval will be $400-450,000, so they will lose 10-20% of their preapproval amount,” he told CREW. “It won’t shut people out, it will just move them lower. If some were on the brink of getting approved, you’ll lose some there, but lower-priced properties will do very, very well.”

In Toronto, that will put single-family detached homes even further out of the reach than they are now, but the popularity of condos will keep soaring.

“In Toronto, with everybody’s sightline coming down, condos will be the most popular,” said D’Abruzzo. “In the GTA, like Mississauga or Vaughan, it will be condos and maybe townhouses.”

Single-family detached homes will become difficult, but not impossible, to afford. The Greater Toronto Area’s fringes still have moderately priced detached houses for sale, and even with the new mortgage rules, that won’t change.

“In Hamilton, Kitchener and St. Catharines, $400,000 gets you a detached home,” he said, “so you’ll see a continued trend of population spreading out into the horseshoe.”

According to D’Abruzzo, 2018 will not be kind to sellers—at least not through the first few months—but he recommends being patient.

“Right now, people are trying to get their places sold before the mortgage rules kick in,” he said. “Next year, inventory will be crap in January and February. If anyone is scared or fearful and waiting to sell their house, patience is the solution right now. Just wait and see, because nobody knows for sure what it will be like.”

Akshay Dev, a sales agent with REMAX Realty One, echoed that wait-and-see approach. While nobody will miss out because of too much time on the sidelines, Dev says Toronto’s chronic housing shortage will continue working in sellers’ favour next year.

“Whatever correction was needed is done, and in the spring we should see the market picking up and being strong,” he said. “In the Toronto area, there’s a huge shortage of housing, so it’s still going to be a seller’s market, but I don’t expect crazy bidding wars. Sellers will still get the prices they’re expecting.”

Contrary to popular belief, first-time buyers won’t have trouble purchasing starter homes, especially because cheaper abodes will be in high demand. However, they might live in those homes longer than the historical average.

“Historically, we’ve seen that when people graduate from their first buying experience, it takes anywhere from three to five years to move into the next level of housing, but it may become five to seven years with new rules,” said Dev.

Source: Canada Real Estate Magazine – by Neil Sharma 8 Dec 2017
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Top dollar: How high can you go?

Affordability is a major concern for today’s aspiring first-time homebuyers. In hot real estate markets like the Greater Toronto and Greater Vancouver regions, however, the desire for affordability can be challenged by the competitive fervour caused by escalating prices and bidding wars. As anyone who has researched homeownership in these markets knows, it’s easy to feel the pressure to bid higher than you’d like.

Resist the urge. It’s important to go house hunting with a firm price range in mind. If something is outside of your budget, it’s not affordable – period. A successful home purchase isn’t about beating out 20 other offers; it’s about sealing the deal on a home you can afford, with money left over each month after your mortgage is paid, to cover your other expenses, savings and a little bit of fun, too.

It’s a tall order, but there is a formula to help you find that sweet spot.

FIND YOUR RIGHT PRICE

Lenders and mortgage insurers look at two debt service ratios when qualifying you for a mortgage (and mortgage insurance, which you will need if you make a down payment of less than 20 per cent the cost of the home).

  • Gross debt service (GDS)
    The carrying costs of your home, such as mortgage payments, taxes, heating, etc., relative to your income.
  • Total debt service (TDS)
    Home carrying costs (mortgage payments, taxes, heating, etc.) plus your debt payments (credit cards, student loans, car loans, etc.), again relative to your income.

The highest allowable GDS ratio is 39 per cent, and the highest allowable TDS ratio is 44 per cent.

Want a shortcut to determining affordability? Use Genworth.ca’s “What Can I Afford?” online mortgage calculator. Input your income, current monthly debt payments and other details for an instant result that shows how much mortgage you can comfortably afford. (Note: For the interest rate, be sure to input the Bank of Canada’s conventional five-year mortgage rate, as that is what lenders use when determining GDS and TDS.)

DOWN PAYMENT STRATEGIES

Once you know how much mortgage you can manage, limit your house hunt to homes that keep you in that price range. That way, you won’t panic or find yourself in financial trouble if interest rates go up in the future.

 

You can buy “more house” for the same total mortgage if you have a larger down payment. Saving aggressively is one way to do that. Pair that with other strategies, such as the following:

  • Borrowing money from your RRSP under the government’s Home Buyers’ Plan.
  • Asking family for help via gifts or loans. (Don’t be embarrassed: 23 per cent of respondents in the 2017 Genworth Canada First-Time Homeownership Study say they’d do it!)
  • Taking on a side gig or second job.
  • Gulp! Moving back home with your parents so you can save on rent.

LOCATION, LOCATION, LOCATION

The other way to end up with a smaller mortgage is to buy a less pricey house. Fixer-uppers help, but the most dramatic payoff may come from expanding your search to a wider radius.

Consider buying in a nearby city or suburb that you can commute to work from. Or blaze new ground by moving farther afield in search of a new home and new adventures – with the spare cash to enjoy them both!

Source: HomeOwnership.ca 

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