When Christian Fraccia first heard about a rent-to-own opportunity in Port Moody, British Columbia, four years ago, he saw a way to realize his dream of owning a home for the first time, so he put his name in the 30-unit lottery.
About 10 percent of the 358 units in development under construction at 50 Electronic Avenue were sold as rent-to-own, meaning buyers pay a two-year fixed rent, which is then converted into equity.
Fracchia, a 28-year-old software developer, has an appointment a week from now to tour his new one-bedroom apartment near the SkyTrain and coastal park. All this for $10,000 and $1,000 per month rent, which goes toward a down payment on $470,000 within two years.
“Basically, it’s like free rent for two years. That money [I pay now] “I will continue to do so as long as I continue with the sale,” said Fraccia, who will move in with his wife in a few months.
Rent to own is a unique path to home ownership that delays one of the biggest hurdles for new homebuyers – the huge down payment.
Advocates of this model of mortgage financing say it allows people with limited or damaged credit who cannot qualify for a traditional mortgage to work toward ownership.
But critics warn that rent-to-own has not been tested and has some pitfalls and risks — such as maintenance costs or the potential for losing a down payment, in some cases, if the tenant fails to meet the terms of the deal.
Canada is funding more projects like this by creating a rent-to-own housing program as part of the $2 billion in spending to double home construction in the next 10 years. The funding, earmarked in previous budgets, aims to create 17,000 new homes across the country, including faster housing for the homeless or those at risk of homelessness, along with affordable, market-priced housing projects.
$200 million rent to own
Of that $2 billion, $200 million is allocated to the new lease-to-own program. This fund, managed by Mortgage and Housing Canada Corporation (CMHC), will encourage developers and builders to create more opportunities for first-time homebuyers who are inundated with down payment requirements, Prime Minister Justin Trudeau said at a press conference in Kitchener, Ontario. , on August 30.
“For many renters, saving to buy a home is increasingly challenging,” Trudeau said. “With this new program, we will work with housing providers to help families transition from renting to owning their own home.”
Applications to the Affordable Housing Innovation Fund for five years and its new rent-to-own stream opened on August 30 for municipalities, developers, builders, community housing organizations, nonprofits and Indigenous organizations.
Back in 2018, when the Panatch Group offered rental-to-own units in Port Moody, 500 people placed orders.
Developer Kush Panatch of Richmond, British Columbia, said he had never offered rent-to-own before and was shocked by the intense interest.
He ended up inviting only Port Moody applicants to some sort of sweepstakes, after reviewing articles—including one from Fracchia, who wanted to stay in the community he loved.
As exciting as it may be, Panatch cautions that rent-to-own isn’t always the best route to home ownership.
“We learned a lot by doing this,” he said. “There have been some nasty surprises, unfortunately.”
He discovered unexpected costs – such as the fact that his company had to bear the cost of GST from the moment the tenant moved until he bought the unit. Also, there were complicated legal aspects to navigate. Panach said higher interest rates had made the program more expensive.
“I think some help from both the federal and regional levels would go a long way toward facilitating a program like this,” he added.
How it works?
The terms of a lease-to-own deal vary. Generally, it is an agreement between tenants and property owners or investors to purchase a home at a specified price at a future deadline. The agreement consists of a lease and a purchase option.
The idea is to hold the property to a potential buyer so that they can provide what is needed to qualify for a conventional mortgage with a lending institution.
Rachel Oliver of Clover Properties north of Toronto runs a private rent-to-own program that she says has helped 600 Ontario families “accelerate their ability to move closer to home ownership.”
Oliver says the tenant generally pays a down payment in one go — her company typically requires $20,000 — and then a monthly rent that’s calculated on what’s needed to get 10 percent of the property’s purchase price by the end of their term. The monthly rent is also calculated on the cost of moving the property at today’s interest rate.
“It’s basically forced savings,” Oliver said. “We sell the property in increments.”
During the lease term, the tenant is often also responsible for paying maintenance and upgrade costs for the home or condo unit.
Why rent to own?
At the start of a lease-to-own agreement, Oliver says, her clients can set a home purchase price of, say, $600,000 with plans to buy in five years. If the value of that property rises to $650,000, the tenant must keep the additional value of the home they contracted to buy.
Meanwhile, the investor – or, in other cases, the developer – holds the mortgage. Rental rates for lease-to-own agreements can vary, but are generally in line with market value rents at this time.
Oliver and her husband work with debt investors so that the tenant can build capital and become a first-time owner much faster than they can save.
Clover Properties is expanding in Alberta and Quebec due to the growing need for families to acquire a home before prices skyrocket.
Oliver says rent-to-own is best suited for renters who struggle to get mortgage approval due to low income or damaged credit.
But she warns that the devil is in the contractual details, which is why she says she works with the buyer and investor to ensure success and avoid “greedy” investors.
Meet the conditions, or lose the down payment
Oliver also notes that rent for owners need to be committed. She says some during the pandemic have lost down payments due to family break-up or other hardships that have resulted in clients not being able to honor their contracts and having to leave.
“If they stop paying on time or pay the contract amount, it will be a breach of contract. We will do everything we can to work with individuals in that case. Once they have exhausted all options… they have to leave the property for which the down payment credits are forfeited,” Oliver said. That’s why we’re doing a very careful examination.”
Also, unlike regular renters, rent to landlords are often responsible for maintenance and modernization.
While Oliver gives credit to the government for exploring an unconventional tool for home buying, she is disappointed that the new federal fund focuses on development projects and does not allow rental owners to shop in the open market for resale homes.
They basically support the developers. We hope the builders can legitimately pass the savings on to the end user,” said Oliver, who believes developers should collaborate with experienced rental providers to manage complex agreements.
Novel path, not well tested
According to housing advocates, rent-to-own programs are working in the UK’s pockets, with some success.
But as in major Canadian cities, UK real estate is so expensive that it is difficult to bridge the gap between low wages and home ownership, and there has been little appetite.
Paula Higgins, chief executive of the HomeOwners Alliance in London, said building safety laws there are weak and there are some issues with rent-to-own financing associated with the new developments. She said some of those units built for renters were of low quality, as developers cut costs but still raised subsidies.
If Canada wants to get into the rent-to-own game, Higgins has some advice: Make sure the tenant is the biggest benefactor.
“I would be very wary of creating a developer-led system – it helps them, not the tenants.”
Higgins says it’s important that high-quality, affordable housing is built, not just high-end properties that attract investors, and ultimately be resold for profit and ultimately to the exclusion of local families.
Gary Schwartz, president of the Canadian Lenders Association, said that asking for a down payment on a first home is a huge hurdle for many people in light of rising property prices and inflation.
“Saving up for a 20 percent down payment has become too much of a burden for many first-time buyers, trapping them in a rental circuit,” Schwartz said.
“It is exciting to see CMHC develop programs that can accelerate innovation in the lease-to-own space.”