Need advice on Rent to Own

[Bernie1263]

I am entering into a rent to own agreement with my son and have a few questions. Once we've established the purchase price and reviewed costs of running a home ( for budgeting purposes ) power, heat etc do I determine the additional amount to collect from him for deposit towards his down payment based on what the bank will require in our province ? ( NS) ex: Purchase price $250,000. 5% will be $12,500. requirement, so over a 3 yr period would equate to $347.22 additional monthly.

I've read that it's good to approach a mortgage broker before hand to seek lenders who support the rent to own agreement, can you recommend any ? Can you also advise please if is it usual for the buyer to pay the insurance and taxes during the contract period or the seller ? Initially we discussed that as part of his expenses but perhaps this is something I should continue myself which can create part of the funds required towards the down payment.?

Will having a rent to own agreement impact my yearly tax situation, and if so in what way.? I don't plan to make any profit with this agreement, I want to help my son in his endeavor to re-establish his credit which he is currently doing in other areas but as well don't want to impact myself in a negative way in terms of appearing like I have additional annual income.? Can you advise on this as well. ? sorry for all the questions, I know we should have lawyers representing both of us but wondered if we can do this without that added expense. I appreciate any advise out there.
Thank you.

 

[Thomas Beyer]

Why not sell it to him when he is ready ?

That is far easier.

You can gift money to kids for a down payment ( unlike to strangers ).

 

[Bernie1263]

Why not sell it to him when he is ready ?

That is far easier.

You can gift money to kids for a down payment ( unlike to strangers ).

Thank you for your reply. Unfortunately the gifting scenario would require a lottery win, which, awesome as that would be, is a bit of a long shot. When I started looking into a rent to buy scenario I thought this may be a practical arrangement that can benefit both of us. He will be able to establish reliability in making mortgage payments, therefore improving his credit score and greater potential for approval when he applies for the mortgage. For myself it allows me the freedom to move in with my significant other and have my mortgage payments covered by someone whom has a vested interest in keeping the property well maintained. I feel it's a win win providing we can get all the particulars covered to protect us both.
I appreciate your response, thanks again.

 

[Thomas Beyer]

$12,000 requires a lottery ?

Why not give it to him now, as a pre-inheritance so he can buy a $250,000 house with 5% down ?

Or give it to him when he can qualify for a mortgage.

Who owns the house now ? Is it rented ?

 

[Brad Redekopp]

Could you not see if your mortgage was assumable and if not break it (incurring costs) and find one that is transfer ownership to him as he assumes the mortgage ?

 

[Matt Crowley]

Have you applied to buy the home together? Why not purchase the home together and agree that he owes you for the down payment?

Rent to own is generally a solution when a home buyer is incredibly anxious to buy a home and works best when they have come into a really good paying job but have not yet saved up for a down payment. In practice, rent to owns usually are used when a buyer is careless with their spending and have destroyed their credit temporarily due to carelessness.

As you can see from descriptions above, rent to own is almost always a bad idea.

Why is he in a panic to buy a house? 5% down payment on a $250,000 house is only $12,500...maybe $15,000 needed after closing costs. Why not wait a couple of months and he can buy on his own?

The other critical check is: can he afford the home on a monthly basis when he has 5% down? If the answer is no, also a bad idea to buy a house. He hasn't earned it yet. And unless you are willing to lend money cheaper than the bank it is not likely you will be paid back on a monthly basis if more than 5% down is put on the property.

I guess you can gamble on appreciation, but that might make the home unaffordable for him when it comes time to refinance...plus you will be stuck with a minimum 20% in the property by bank rules.

With 5% down, you are also stuck paying CMHC fees, equal to 3.6% of total purchase price with 5% down. So $9,000 on this property. It is fully earned by CMHC on purchase and is tagged onto the mortgage. Obviously will need to be paid if you sell.

First home buyers with 5% down are usually underwater for the first 4 to 5 years of owning their home due to realtor fees, closing costs, and CMHC fees; even after considering the principal pay down.

Unless this home is a once in a lifetime opportunity, rent to own really doesn't make any sense financially. If you do the math for a buyer on rent to own it is equivalent of buying a house on a credit card. Just ridiculous, should be outlawed. Honestly, there are better programs available from government agencies and many cities that do essentially the same thing much more efficiently and fairly.

 

[Sherilynn]

In practice, rent to owns usually are used when a buyer is careless with their spending and have destroyed their credit temporarily due to carelessness.

These are the people to whom lease options should never be offered. RTO should be used for responsible people who have experienced hardships bruising their credit. Divorce, medical issues, business failure, and job loss are good examples. RTO is also useful for people new to the province or newly incorporated.

Furthermore, RTO is for people with money up front and who make reasonably high incomes. I would never offer a lease option to anyone who didn't have a reasonable initial option payment. This applies doubly to family and friends.

Once a tenant has any sort of purchaser's interest in the property (namely the option to purchase), it can be extremely difficult to evict that person. Of course, you have no reason to suspect you would ever need to evict your son, but having been in the RTO business for many years, I have heard of stranger things happening.

Bottom line is I wouldn't recommend RTO in this situation. Regardless, I'll answer a few of your questions:

• normally the property taxes and insurance are paid by the owner and the costs are covered by the rent
• repairs, utilities, and tenant's insurance are usually paid by the tenant
• which lenders allowing RTO change over time, so no need to approach any now. What is required is to have an option agreement that meets the requirements of CMHC. Without this, you will have difficulty getting approval later.
  • you should also have a market rent analysis done for the property. At the very least you should file away a few ads that show you are charging fair market rent. Only amounts above fair market rent can be used for down payment.
• your son should speak to a mortgage broker or banker who specializes in working with people with bruised credit in order to get some credit repair advice. BTW, entering a RTO will have no effect on your son's credit, assuming you don't report to the credit bureaus.
• Yes, RTO will affect your tax situation. The tenant must pay fair market rent in order for any amount of the monthly payment to be used for proof of down payment. Therefore you will make money every month. If your goal is to not make any money, then you may sell later at a cheap price, causing a loss in the year you sell to balance the income over the years of rental. However, you will likely pay extra taxes during the rental.
• The only way to have zero tax impact is to sell via agreement for sale with seller financing. You would sell at the same price and use the exact same mortgage terms between you and the buyer as you have on your underlying mortgage. Then there should be zero effect on taxes. However, I absolutely would not recommend this without a substantial down payment, so it wouldn't work here.

 

[Bernie1263]

Thanks for your advice, I can see now there are many things to consider before entering into this type of agreement, I will seek some outside professional help before moving forward.

Have you applied to buy the home together? Why not purchase the home together and agree that he owes you for the down payment?

Rent to own is generally a solution when a home buyer is incredibly anxious to buy a home and works best when they have come into a really good paying job but have not yet saved up for a down payment. In practice, rent to owns usually are used when a buyer is careless with their spending and have destroyed their credit temporarily due to carelessness.

As you can see from descriptions above, rent to own is almost always a bad idea.

Why is he in a panic to buy a house? 5% down payment on a $250,000 house is only $12,500...maybe $15,000 needed after closing costs. Why not wait a couple of months and he can buy on his own?

The other critical check is: can he afford the home on a monthly basis when he has 5% down? If the answer is no, also a bad idea to buy a house. He hasn't earned it yet. And unless you are willing to lend money cheaper than the bank it is not likely you will be paid back on a monthly basis if more than 5% down is put on the property.

I guess you can gamble on appreciation, but that might make the home unaffordable for him when it comes time to refinance...plus you will be stuck with a minimum 20% in the property by bank rules.

With 5% down, you are also stuck paying CMHC fees, equal to 3.6% of total purchase price with 5% down. So $9,000 on this property. It is fully earned by CMHC on purchase and is tagged onto the mortgage. Obviously will need to be paid if you sell.

First home buyers with 5% down are usually underwater for the first 4 to 5 years of owning their home due to realtor fees, closing costs, and CMHC fees; even after considering the principal pay down.

Unless this home is a once in a lifetime opportunity, rent to own really doesn't make any sense financially. If you do the math for a buyer on rent to own it is equivalent of buying a house on a credit card. Just ridiculous, should be outlawed. Honestly, there are better programs available from government agencies and many cities that do essentially the same thing much more efficiently and fairly.

 

[Dan 7612]

Regarding telling the lender that this is a RTO - I typically don't tell the lender it is a RTO - for my deals, I have a separate lease agreement and APS. I send the lender the lease agreement. I did tell a lender early on that I wanted the mortgage for a RTO and they denied my application stating that the legal department feared that the RTO client could come after the bank because they were not on title. (Yah- I agree - what not on title??) To avoid any questions I don't disclose the RTO as it is not a sure thing until the deal closes.

 

[April Lavine]

Looking for the same thing thank you.
http://www.irvineresidentialliving.com/

 

[Adria Winburn]

These are the people to whom lease options should never be offered. RTO should be used for responsible people who have experienced hardships bruising their credit. Divorce, medical issues, business failure, and job loss are good examples. RTO is also useful for people new to the province or newly incorporated.

Furthermore, RTO is for people with money up front and who make reasonably high incomes. I would never offer a lease option to anyone who didn't have a reasonable initial option payment. This applies doubly to family and friends.

Once a tenant has any sort of purchaser's interest in the property (namely the option to purchase), it can be extremely difficult to evict that person. Of course, you have no reason to suspect you would ever need to evict your son, but having been in the RTO business for many years, I have heard of stranger things happening.

Bottom line is I wouldn't recommend RTO in this situation. Regardless, I'll answer a few of your questions:

• normally the property taxes and insurance are paid by the owner and the costs are covered by the rent
• repairs, utilities, and tenant's insurance are usually paid by the tenant
• which lenders allowing RTO change over time, so no need to approach any now. What is required is to have an option agreement that meets the requirements of CMHC. Without this, you will have difficulty getting approval later.
  • you should also have a market rent analysis done for the property. At the very least you should file away a few ads that show you are charging fair market rent. Only amounts above fair market rent can be used for down payment.
• your son should speak to a mortgage broker or banker who specializes in working with people with bruised credit in order to get some credit repair advice. BTW, entering a RTO will have no effect on your son's credit, assuming you don't report to the credit bureaus.
• Yes, RTO will affect your tax situation. The tenant must pay fair market rent in order for any amount of the monthly payment to be used for proof of down payment. Therefore you will make money every month. If your goal is to not make any money, then you may sell later at a cheap price, causing a loss in the year you sell to balance the income over the years of rental. However, you will likely pay extra taxes during the rental.
• The only way to have zero tax impact is to sell via agreement for sale with seller financing. You would sell at the same price and use the exact same mortgage terms between you and the buyer as you have on your underlying mortgage. Then there should be zero effect on taxes. However, I absolutely would not recommend this without a substantial down payment, so it wouldn't work here.

Thanks for the tips..

 

[Sherilynn]

Regarding telling the lender that this is a RTO - I typically don't tell the lender it is a RTO - for my deals, I have a separate lease agreement and APS.

Correct. The bank doesn't need to know you have offered the tenant an option to purchase. The option has zero effect on your mortgage other than helping to determine the length of the mortgage term.

The only bank that needs to know it is an RTO is the tenant's bank when he exercises his option to purchase. Then all the contracts will need to be reviewed by the tenant's lender.