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Rent-to-own offers new revenue source for real estate professionals

In simple terms, a rent-to-own (RTO) agreement is where a client agrees to rent the property from the owner for a specified period of time (usually three to five years) and then has the option to purchase the property at the end of the lease period, generally at an increased price, and as long as the specified contractual conditions are satisfied. The benefit to real estate professionals is that is by partnering with a RTO investment company (or starting your own) you may gain access to a whole new segment of the population who wouldn’t normally be clients.

Typically most rent-to-own investors allow the client to find their perfect house, within an agreed budget, and the real estate sales rep (who works in partnership with the investor) takes the RTO client around as they would any other client. Once the perfect house is found and the terms negotiated and accepted, the investor purchases the property and then leases it back to the client for a specific term and with specific conditions, with the option that the client can purchase the property at the end of the term.

The agent earns commission as the buying agent on this initial transaction. Agents don’t typically get anything on the other end if the client purchases the house from the investor at the end of the lease period.

Brett Scheidl

Brett Scheidl

Brett Scheidl, a salesperson with Realty Executives Saskatoon, has been working with RTO clients for about two years. He says the RTO opportunity found him after an investor came across his business card and happened to be looking for an agent. Scheidl says he was somewhat hesitant when the investor first called.

“Rent-to-own can have a negative connotation to it, especially when you don’t really understand it,” says Scheidl. “But I knew the investor so I heard him out and liked what I heard.”

Scheidl says what he liked most was that the investor created a winning situation for all of the parties involved: the salesperson, the investor and the rent-to-own client, who Scheidl says was truly being set up to succeed to eventually own the home.

For the agent, Scheidl says it’s important to realize that RTO is just another revenue stream that has high and low periods like anything else. The biggest advantage, he says, is that it’s repeat business once you develop a relationship with the RTO investor or company.

Brendan Kelly

Brendan Kelly

Brendan Kelly, a broker with Re/Max Realty Enterprises in Mississauga, Ont. echoes Scheidl’s thoughts and says RTO is a great way for an agent to make use of their real estate expertise to create another source of revenue. Kelly, who also is a real estate investor, completed his first RTO deal after one of his long-time tenants was looking to own their own home. As he says, while it still required research, it was an easy first deal to complete because he knew the person.

Kelly is also partnered with an RTO investment company and represents them as their Realtor. He agrees that not all companies are created equal and don’t always set the client up for success. He says there are essentially two types of RTO clients: those who don’t have enough of a down payment to purchase a house and those who have credit issues.

“Most of the people looking at RTO have credit issues, for whatever reason, and can’t get a mortgage,” says Kelly, adding that a reputable investor will carefully screen and income-qualify the client to ensure they are a good candidate. The goal is to set the client up for success so that, at the end of the term, they will be able to afford and qualify for a mortgage. This also means the clients need to be given the tools to help them repair their credit over the term of the RTO agreement.

The sad reality is some RTO investors don’t offer as much support to the client or build contingencies and flexibility into their contracts. So when the term comes up and the client still can’t get a mortgage, the investment company walks away with the down payment and accumulated funds and the client is left with nothing.

“You have to be doing this for the right reasons,” says Kelly, adding that its people’s lives you are dealing with.

A.J. Hazzi

A.J. Hazzi

A.J. Hazzi, Kelowna, B.C. real estate investor and broker/owner with Vantage West Realty, started doing rent-to-own deals in 2008 during the global financial crisis, but from a different angle: he started offering RTO as an exit strategy for homeowners who wanted to sell but couldn’t in the down market.

“I had a lot of customers who basically had to move, for any number of reasons, but couldn’t afford to sell because they had very little, if any, equity built up in the house,” says Hazzi. “Rent-to-own became a great exit strategy for these people because it allowed them to move on with their lives with a nice option down payment, generally in the $20,000 to $30,000 range (received from the rent-to-own client as a down payment towards the future purchase of the house) while their house was being rented and looked after.”

As Hazzi says, the RTO agreement allowed these selling clients to build up greater equity in the house, while having their mortgage paid down, all while the market corrected itself over the next three to five years. At the end of the term, the RTO client would buy the house at a predetermined increased rate of appreciation, and it would turn out to be a winning situation for everyone involved.

What Hazzi didn’t expect was the number of quality buyer leads RTO would generate. He says around the same time, there was a tightening of mortgage qualifications, which squeezed out about 15 per cent of previous would-be buyers, creating a whole new market of RTO clients.

“I had so many prospects that I had to create a web landing page that prequalified people based on several factors like income, credit history and the amount of a deposit they had available,” says Hazzi. “It produced a steady stream of quality people who were eager.”

Hazzi says in the down market, he was one of the few brokers who offered a solution for the seller that replicated a hot market because there were more buyers than there were houses.

“By 2009 there were a tonne of listings but very few buyers, so it was hard to be a seller,” says Hazzi. “But as a seller of RTO properties, there was a maximum of about 20 properties on the market a buyer could consider and I had thousands of rent-to-own applicants. We flipped the tables and created a win-win for everyone involved.”

A key piece of advice Hazzi offers is to make sure the RTO investor is working closely with a mortgage broker to prequalify the RTO client based on their current income.

“Income qualification is key,” says Hazzi. “You need to be sure the client can service the future mortgage payment based on their current earnings and not what they think they might be earning in three to five years time.”

The other key piece, he says, is to make sure the client is connected with a third-party credit repair service who can help them relearn their relationship with money and help them rebuild their credit.

“That’s where rent-to-own has been given a bad name,” says Hazzi. “Some investors are really hoping the client can’t afford the house in the end so that the investor walks away with everything: the house, the down payment option money, whatever. That’s not right. I structure my contracts to account for all kinds of ‘what-if’s’ and with as much manoeuvrability and flexibility as possible to help make the arrangement a success for everyone.”


What is rent-to-own?

In simple terms, a rent-to-own property is where a client will agree to rent the property from the owner, for a specified period of time, and have the option to purchase the property at the end of the lease period as long as the contractual conditions are met. Contracts vary considerably between investors and rent-to-own investment companies, but generally cover such things as duration of the lease, who pays expenses such as utilities and taxes, who is responsible for repairs and other maintenance, how much of an option down payment is required by the client at the onset and how much of the rent is being optioned towards the future down payment.


Advice from a rent-to-own expert

Mark Loeffler

Mark Loeffler

Mark Loeffler is an expert on real estate and real estate investing. He’s a salesperson with Keller Williams Complete Realty, which serves the Hamilton and Greater Toronto Area, an experienced real estate investor who purchased his first investment property as a 19-year-old and who now has a portfolio of more than 50 properties.

He’s the author of Investing in Rent-to-Own Property: A Complete Guide for Canadian Real Estate Investors and Fix and Flip: The Canadian How-To Guide for Buying, Renovating and Selling Property for Fast Profit.

Loeffler says he was introduced to rent-to-own by another investor. It was a strategy he liked – so much so that it was one of the reasons he decided to become a Realtor.

“I was doing up to four rent-to-own deals a month and making anywhere from $4,000 to $5,000 a deal,” says Loeffler. “But the agent was making anywhere from $7,000 to $8,000 for each of my deals.”

Loeffler laughs, then adds, “Needless to say, a few months later I had my real estate licence.”

He agrees that not every rent-to-own investor has the client’s best interests in mind.

“Look, there are good people in the rent-to-own industry and there are bad ones, no different than Realtors or any other industry,” he says. “The difference is the rent-to-own industry isn’t regulated, and that’s a big difference.”

He says his book will help real estate professionals not only understand rent-to-own investing better, but will give them a solid understanding of how to differentiate between which investors create win-win scenarios for both themselves and the rent-to-own client, and which ones don’t.

The client qualification process, he stresses, is key.

“Realtors should be asking the investor what their client qualification process is,” says Loeffler. “If they answer something like, ‘whoever has a big enough down payment wins’, that’s usually not a good prequalification. You want someone who literally takes the client through the mortgage application process and figures out what the client needs to do (to be able to qualify for a mortgage at the end of the lease term.)”

At the end of the day, he says, “it’s the be all and end all.”

He says a good rent-to-own client has good income but bad credit, for whatever reason. That leads to two more questions that agents should be asking a potential investor they’re considering working with: what sort of support they offer the client in terms of repairing their credit and if there is any accountability.

Loeffler says in all of his contracts, he builds flexibility and plans for contingencies to accommodate circumstances like whether the client wants to extend the lease or simply get out.

“Rent-to-own is a great investment strategy,” says Loeffler. “If a Realtor is working with a couple of people who are doing a few deals a month, it can be a profitable venture. You just want to make sure you’re doing it right and are working with the right people who have everyone’s best interests in mind.”

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