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Compare a Flex Down Mortgage vs. Rent to Own

A flex down mortgage is a standard, full featured mortgage product with the added flexibility of owning a home now, rather then waiting years to save up a down payment. This is in stark contract to a Rent to Own homes:

The dark side of Rent to Own agreements

As a consumer you are protected buy multiple regulatory bodies in Canada who oversee the professionals you depend on when buying a home. This ensures the Realtor, Mortgage Broker and Lawyer you trust are acting in your best interests. As such, an individual can not just decide one day to deal in real estate, or provide mortgages, or give legal advice to the public.

It is because of this trust of the industry that many potential home owners enter in to rent to own program, thinking if this is a bad deal the authorities would stop them . But this is not the reality because of the Homeowner Exception, specifically individuals do not require a license and may trade in real estate if the subject property is owned by them.

Of the rent to own contracts we have received one fact stands out - the contract overwhelmingly favours the landlord. But the potential homeowner will not discover this fact until the end, when it is time to purchase the home. This is not by accident. Some real estate investing groups market rent to own seminars to landlords as a means to boost their rental income, knowing the majority of renters will be unable to close the contract.

Why are a majority unable to purchase? Here are actual situations we have run into and continue to see:

Our clients were renting a property with aspirations to own their home within two years. They had no down payment saved but their landlord offered them a solution: Rent-to-own. A contract was signed and the landlord allocated a portion of the rent towards the 5% down payment.

Two years later and it's time to exercise the option to buy the home. However, during the mortgage approval a startling fact was discovered, the appraised value of the home was lower then the total mortgages outstanding on the property. The landlord didn't have financial means clear the mortgages from title so our clients had the legal right to cancel the rent-to-own contract and receive a full refund of their saved down payment.

There was just one problem, the landlord didn't save their down payment in a separate trust account or any account for that matter. As he received the funds, the landlord simply spent the money as his own. Their down payment was gone and in the end their only option was to sue for the return of their down payment.

The most common of all Rent-to-own horror stories is the cash grab. This is how it works: Advertisements are placed offering home ownership solutions to individuals with bruised credit, bankruptcy, etc. Their product is a Rent-to-own, but here's the problem - the individual with poor credit must still qualify for a traditional mortgage at the end of the rent-to-own term. And a one, two, three or even four year timeline may not be enough time to repair one's credit.

The length of time it takes to repair credit varies widely from person to person and their specific situation. Some Rent-to-own ads will offer credit repair steps or advice, stating "we'll get you on track to buy a home", but these individuals are not licensed mortgage brokers and have no clue what CMHC and the banks will require for credit.

In the end, the vast majority of Rent-to-own deals with poor credit do not qualify for the mortgage at the end of the contract. They cannot take possession of the home and exercise their option to buy and as such, their cash deposit, and sometimes their down entire payment, is forefeited to the landlord. On purpose or accident this Rent-to-own only benefits the landlord.

The Inflated Purchase Price: With many Rent to own deals the final purchase price of the home is left - up in the air. One would assume the appraised value of the home would be a good starting point. However, since these option contracts are being drawn up without the guidance of a lawyer it's not uncommon to find the buyer and landlord agreed to an inflated price back when the contract was signed.

So when it comes time to buy the home and obtain a mortgage, the banks and CMHC will require an appraisal. We had one client had a agree to a price of $400,000 a year prior but at the time of mortgage application the appraised value of the home came out to only $300,000. There's is zero chance any bank will provide a mortgage for the higher amount, so the client's only option was to come up with $100,000 cash to cover the shortfall. He was unable to do this. In this situation not only did he loose his initial $5000 deposit but landlord also kept $15,000 of the down payment he had saved. He walked away from this home and was unable to obtain any of his money back because he had a signed contract. A lawyer may cost $2000, but in this situation that would have saved him $20,000.

Click to download rent to own tips and to view a sample contract:

Rent to Own Tips

Sample Rent to Own Contract

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