How Does Your Rent-to-Own Program Work?
In its simplest terms our Rent to Own program works as follows. After we determine that the likelihood of your success in our Rent to Own program is high, you will work with one of our realtors to find your future home. Prior to move-in, you will purchase a non-refundable option from us which gives you the right, but not the obligation, to purchase this house from us at a specific price approximately 1 to 3 preferably 2 years in the future. For the length of the lease term, you will abide by a lease and pay rent to us just like any other tenant. Part of your monthly payment will be set aside for you and can be used to help purchase the home. At then end of your lease term, you exercise your option, get your own mortgage and we transfer ownership to you. For a more detailed explanation of the process please review our Rent to Own Program.
Please explain the option and how much does it cost?
The option which you purchase from us gives you the right, but not the obligation, to purchase the house you will be renting from us at a specific price at the end of your lease term. All of our options cost 4% of the homes initial purchase price although this could be negotiable depending on the situation. When you exercise the option and purchase the house, the money spent to purchase the option will be put towards the purchase price. When you decide not to exercise the option and walk away from the deal, your option will expire and the money you spent to purchase the option will not be refunded.
Why is the option fee so expensive?
The option fee is expensive for two reasons. First, in order to qualify to purchase a house in Canada you require a 5% down payment. Therefore, at the end of the term you will need a minimum down payment of 5% plus an estimated 2% more to meet specific CMHC requirements and for your closing costs. The second reason for the 4% option fee is that in the event that you do not follow through and purchase the house we will need to sell it. Since we will likely use a full service broker to do this we will need to pay the broker 7% of the first $100,000 and 3% of the remaining sale price. Essentially, your option fee will end up paying a realtor to sell the house that you decided not to purchase.
Also, studies have shown that the higher the option fee, the higher the probability that the tenant will exercise their option. This is a win-win situation. In an article in the May/June 2016 Canadian Real Estate Wealth magazine (page 32) an experienced Rent to Own investor indicated that only 70% of people who initiate a Rent to Own will follow through and purchase the property. We want you to be one of the 70% and one of the best ways to increase your probability of purchasing the property will be to have a large option fee upfront.
During the term, who pays the property taxes and home insurance?
We are responsible for paying the property taxes and insurance during your rental term. You will be required to have your own tenants insurance policy to cover your own possessions as well as fire and liability insurance to cover any damage which may inadvertently be caused by you or someone you invited into your home.
What credit score do I need to begin this program?
In order to begin this program you need a credit score above 520. By working with Money Mentors during your lease term you should be able to increase this credit score to approximately 680 or higher which will increase the probability of obtaining a loan from one of the main banks. If your credit score is currently under a 450, please go to our improve your credit score page and begin to work on this if you are truly interested in purchasing your own home and improving your credit score. Once your credit score is above 450 you are welcome to apply to our program. Alternately, you can contact us to discuss your situation.
For new Canadians who have not yet established credit and meet all of our other criteria, a credit score is not required.
Can I have my lawyer review all documentation?
Yes, it would be preferred to have your own lawyer review all documentation. You will need to sign off on documentation which indicates that you have either used your own lawyer or understand that you are waiving your rights to use your own lawyer. One of the challenges you will have when discussing these documents with your own lawyer is that many lawyers have never seen them before. Their immediate reaction is to recommend to not move forward simply because it is easier than understanding the document. However, if you ask them if they will help you buy a house in most cases they will say no. Therefore what we suggest is that you use a lawyer that is different from ours but who has some knowledge of Rent to Own contracts. We can provide a list of lawyers who have some knowledge on Rent to Own contracts in both Airdrie and Calgary.
Can I modernize the rental property?
You are allowed to renovate and modernize this property provided you have authorization from us, ensure the correct permits are in place and use qualified trades. When you do this, please be advised that if you decide not to exercise your option no money will be returned to you based on the renovations that you do. Prior to doing a renovation, you will also need to pay us 50% of the expected cost which we will in turn use to pay the last 50% of your contractors bill.
How are the monthly payments determined?
Your lease will indicate one monthly rental payment. This payment will be paid in two portions.
Portion one is a standard rental payment which will be based on the cost of the monthly mortgage payment, insurance, property tax and miscellaneous fees. Our program is set up in such a way that these fees will be part of your rent and we will pay these bills. Since you will eventually become a home owner, you need to get use to paying them, which is why the rent is calculated this way. The solid black line in the graph below shows the expected base rent vs house price. It is based on a 3.5% interest rate.
The second part of this payment will be deposited into another bank account. This amount will be variable and will depend on a number of factors. The maximum you would be expected to pay is illustrated in the above graph by the red dotted line. These option premiums will be accumulated for you and given back to you after you exercise your option to purchase the property.
In total, the option fee and monthly option credits need to add up to approximately 7% of the future house price. This gives you the highest probability of success.
Who pays for phone, cable, Internet and utilities (water, electricity and gas)?
In this program, the tenant is responsible for paying the phone, cable, internet and utilities. The utilities typically include water, electricity and gas. If you choose to add a security system to the house you will also be responsible for this.
Who pays for the maintenance of the property?
When the house is initially purchased, we ensure that it is in good shape by using a qualified home inspector. During the length of your tenancy, the number of major repairs should be minor. As we are the homeowners and you are the tenant we will be responsible for all repairs. However, repairs that arise due to use of the house such as clogged sinks, clogged toilets and burned-out light bulbs will be your responsibility. Also, if you get locked out of the house it will be your responsibility to call a locksmith to get you back in. Further, anything that is broken by you or a related party will need to be fixed by yourself. Things which break on their own can be repaired by us. For any major work that is required on the home the repair price will be added to your purchase price.
What happens when a mortgage broker cannot qualify me with a lender at the end of my lease?
Our mortgage broker will set you up with an app which will provide you your credit score on a monthly basis. Since we have quarterly meetings with you, in which we will review your progress in regards to improving your credit score and Money Mentors has given you a plan to improve your credit score we will know six months to a year in advance of your lease expiring that you need to make more changes in your lifestyle. At this point in time, we will sit down with you and determine why you are not meeting your set objectives. It will be up to you to make these lifestyle changes, we can only advise you on what changes to make. In some cases, clients have major life-changing events occur. Examples of life-changing events are the loss of a job, divorce, major illness or being offered a job in a new city. Each of these challenges will require a different path forward. In some cases we can extend the program while in others you may have to walk away from your option. On the other hand people just make bad decisions. Every time you make a decision, ask yourself is this decision helping or hurting me?
What sorts of contracts do you use?
Prior to removing the conditions on the initial home purchase agreement, you and anyone over the age of 18 will be required to sign an Alberta lease agreement and provide your first months rent. The lease will be similar to other leases you have signed when renting a property in Alberta.
Also, you will be required to purchase the option. The option to purchase contract will give you the right, but not the obligation, to purchase the property from us at a specified price within a specific time frame. Within the option agreement, we will identify how much of your rent will be deposited into a separate account which will ultimately be returned to you when you exercise your option. Finally, you will need to hand write key sentences from the option agreement onto the back of our option agreement to ensure that you understand these specific clauses.
After you exercise your option, we will use a standard purchase agreement to transfer the home ownership to you. In this case, we will not use a realtor however, both sides will use their own lawyer to close the deal.
How much time is typically required for me to qualify for a mortgage?
Our Rent to Own program preferably last 1 or 2 years. Occasionally, issues arise in a two-year program and it needs to be extended to three years. We will not accept anyone who will require three years or more to qualify simply because the longer the term the more difficult it is to determine a reasonable exit price, the higher the probability the client will have a life-changing event, the higher the probability that the client won’t like the house anymore and the higher the probability the house will require extra maintenance.
Do I require a down payment?
No. In this program once you exercise your option and secure your own mortgage the money which we collected from you via the option contract and monthly option credits will be deposited in a trust account with our lawyer. These funds will be used to help you pay for the house you are purchasing only after you exercise your option.
Am I require to provide last months rent?
No, in this program you purchase an option and are not required to provide last months rent.
How do I pay for the option?
To pay for the option, you will provide our lawyer with either a certified check or bank draft.
Can I use borrowed funds for my initial payment?
No, ultimately the bank will want to know where the funds came from and will need to see that they originated from your account prior to purchasing the option. Using borrowed funds, increase the probability that the banks will not qualify you for a mortgage.
Can I rent out the property?
No. By renting out the property, you would be responsible for any inappropriate action of the person who sublets the house. Also renting out the house to somebody else cause issues when you decide to exercise your option.
Can self-employed or people working on commission qualify?
Yes. The challenge here is to ensure that the income history you have when you exercise your option will be sufficient to qualify for a mortgage.
Do I need to be employed?
No. To qualify for this program, you will need some type of employment or be able to show how you generate an income. Also, your income will need to meet our minimums. When you cannot meet our minimums, it will be very difficult for you to qualify for a mortgage which will result in you losing your option rights.
Can I negotiate the final home purchase price?
No. The future purchase price of the home is fixed at the start of your lease. Typically, we increase the purchase price of the house by 2 to 3% per year over the life of your lease. Your monthly rental payments will not increase during the initial lease lifetime. When the house price appreciates more than the expected amount, upon closing this equity will become yours.
When looking for a house within the Calgary area, what can I purchase?
This program is designed with the first-time homeowner in mind. The house typically will consist of three or more bedrooms with two or more full bathrooms. The house will be a single-family unit with a basement, in a desirable neighborhood and must be easy to resale. The area needs to have shown increased pricing over the last five years. Also, the house will need to pass a home inspection which you will need to pay for. These typically cost approximately $500.
What type of property don’t you buy?
We do not purchase the following:
- Mobile homes
- Country estates
- Homes over $425,000
- Rundown homes
- Homes older than 30 years
- Homes which need a large amount of repairs
- Homes in poor neighborhoods
- Homes which were used for illegal purposes
What if I don’t qualify for your program right now?
Our program is designed to give you the highest probability of becoming a homeowner within two years. If you do not meet our minimum income requirements perhaps, you should look at a program that will allow you to purchase a condominium, duplex or townhouse. These properties cost less than a single-family home although they are not as easy to resale.
When you have the income level but lack the option fee we would suggest that you start saving 10% of your income and set it aside for a future home purchase.
Alternately, provided you have a high enough income you could go with a flex down program. Essentially, you would need someone (bank or other lender) to give you a line of credit. You would use this line of credit as your down payment and then get a mortgage from another lender. My mortgage broker told me about this this the other day.
The program is described in the article below.
One other option is available to those who have an RRSP and have never owned a house or have not owned a home for 4 years. For these people, you could use your RRSP as a down payment. The link below talks about this program.
When your income level is too low and you want to own your own home we suggest you start to work on a goal to increase your income. To accomplish this you will need to think differently than you do now. Start by identifying a simple goal, take some action toward the goal, evaluate the action, change the action or repeat it and keep repeating this until you get what you want. Books which I have found useful are:
The Science of Getting Rich by Wallace D. Wattles (free download)
Creating a Bug Free Mind by Andy Shaw (first 10 chapters free)
You Were Born Rich by Bob Proctor (free download)
Jack Canfield’s 10 day transformation course (free course)
The five books recommended below are linked to Amazon. As an Amazon Associate I earn from qualifying purchases
The Success Principles by Jack Canfield
Rich Dad Poor Dad by Robert Kiyosaki
Paradigms by Joel Barker
Afformations by Noah St. John
Think and Grow Rich by Napoleon Hll
If you meet our income requirements but your credit score is too low, we would advise you to review our webpage on how to improve your credit score.
What happens when I default or am late on my monthly rent payment?
When you cannot make your rent payment, you will be considered to be in default under the terms of your lease. When this occurs, you need to discuss with us as soon as possible so we can identify a potential solution. If it becomes evident that there has been a life changing event and that you are no longer able to meet your obligations then we will need to design an exit strategy for you which gets you out of the house and into something you can afford as quickly as possible. Following this route will allow us to give you 30 to 40% of your option credits back. For more details on what to expect when you do not exercise your option please visit our options page.
However, if you decide that you want to go down the eviction route then the amount of money you can expect back will likely be zero as you will be left with whatever money is left over after the eviction process. You have to understand, that all documentation which you have signed are legal documents and failure to pay your rent will put you in breach of these contracts.
What happens when I decide that I don’t want to exercise my option?
Exercising the option you have purchased is always your decision. If for whatever reason you decide that you no longer want to purchase this house then tell us and we will work with you to determine an exit strategy for you. How you leave the property will determine how much of your option credits you will get back. For more details on what to expect when you do not exercise your option please visit our options page. In a perfect world, you will receive 30 to 40% of your option credits back.
How soon can I move into my new home?
The entire process usually takes anywhere from 8-16 weeks from start to finish. It may take 2-3 weeks initially to complete the full approval process which includes designing a program specific to your individual needs. You will then go shopping for homes with our realtor – the time it takes is up to you and also depends on the availability of suitable homes for sale. Allow 2 to 6 weeks. Once you have found your dream home, we will then place an offer to purchase. Once our offer is accepted, there is generally a 2 to 3 week condition period where we ensure the home is in great shape and free of defects. After all conditions have been met, expect another 2-4 weeks to close before you can move into the property.
What can I do to own my home as soon as possible?
The best way to own your home as soon as possible, is to consider home ownership your number one priority during your lease term. Save as much money as you can, follow all of the guidance offered to you by Money Mentors and avoid any large spends such as vacations, new cars or boats (i.e., toys). The faster you repair your credit and save for a down payment the sooner you will be able to purchase the home from us.
Why do I need to qualify for a new mortgage at the end of the term?
Initially, we will own the home and have a mortgage on it.. During this time period, you are a tenant/renter with an option to purchase. Once you exercise your option, you will need to purchase the house from us and to do that will typically require a mortgage.
Is my debt ratio too high? Just how much home can I afford?
When your debt ratio is too high, this program will not work for you. Basically, the probability that you will default on a payment and not be able to exercise your option is high. Therefore, we strongly suggest that you talk to Money Mentors and reduce your debt before considering home ownership.
What if I can’t find a home I like?
There is no rush, in finding the home that you desire. You should expect this process to take anywhere from 2 to 6 weeks. However, you might find your dream home faster or it could take you longer. If you cannot find a home within three months, then perhaps, you should rethink your desire for home ownership. After three months, you will forfeit your application fee and we will need to part ways.
When do I need to declare that I want to exercise my option?
Typically, three months prior to the expiration of the lease you would indicate that you want to exercise the option. At this point we would start to put the wheels in motion to complete the transfer.