Canada adheres to the lease-to-own concept. Here’s how it works

When Christian Fracchia first heard about a rent-to-own opportunity in Port Moody, British Columbia four years ago, he saw a way to fulfill his dream of home ownership. ownership for the first time, so he put his name in a lottery for 30 units.

About 10% of the development’s 358 units still under construction at 50 Electronic Avenue have been sold on a lease-to-own basis, which means buyers pay a fixed rent for two years, which is then converted into equity.

Fracchia, a 28-year-old software developer, has a date in a week to view his new one-bedroom apartment near the SkyTrain and a beachfront park. All for $10,000 down and 1 $000 per month in rent, which will be used to pay a down payment on the place of $470,000 in two years.

“Essentially, it’s like free rent for two years. That money [I pay now] I can keep going as long as I go through with the sale,” said Fracchia, who will move in with his wife in a few months.

Christian Fracchia and Persephone Lavender will soon move into their rent-to-own apartment in Port Moody, BC after a four-year wait. Fracchia won a lottery after more than 500 people bid for a chance on about 30 one- and two-bedroom units just steps from Rocky Point Park. (Submitted by Christian Fracchia)

Rent-to-own is a unique path to homeownership that delays one of the biggest hurdles for first-time homebuyers – the heavy down payment.

Proponents say this home financing model allows people with limited or damaged credit who cannot qualify for a traditional mortgage to work on home ownership.

But critics warn that rent-to-own is untested and comes with certain pitfalls and risks, such as maintenance costs or the possibility of losing the deposit, in some cases, if a tenant fails to comply. not the terms of the agreement.

Canada is funding more projects like this by creating a rent-to-own program as part of $2 billion in spending to double home construction over the next 10 years. The funding, provided in previous budgets, aims to create 17,000 new homes across the country, including faster housing for those who are homeless or at risk of becoming homeless, as well as affordable and affordable housing projects. of the market.

$200 million lease-to-own fund

Of that $2 billion, $200 million is for a new lease-to-own program. The fund, managed by Canada Mortgage and Housing Corporation (CMHC), will encourage developers and builders to create more opportunities for first-time homebuyers overwhelmed with down payment requirements, said the Prime Minister Justin Trudeau at a press conference in Kitchener, Ontario. , August 30.

“For many renters, saving to buy a home is increasingly difficult. Through this new program, we will work with housing providers to help families transition from renting to owning their homes,” Trudeau said.

Applications for the five-year Affordable Housing Innovation Fund and its new rent-to-own component opened on August 30 to municipalities, developers, builders, community housing organizations , non-profit organizations and Aboriginal organizations.

Prime Minister Justin Trudeau was in Kitchener, Ont., on August 30 to reveal a plan to add a total of 17,000 new housing units across Canada. (James Chaarani/CBC)

In 2018, when the Panatch Group offered rent-to-own housing in Port Moody, 500 people applied.

Developer Kush Panatch of Richmond, British Columbia, said it had never offered a lease-to-own before and was shocked by the overwhelming interest.

He ended up inviting Port Moody applicants to a sort of lottery, after reviewing essays – including one from Fracchia, who wanted to stay in the community he loved.

While exciting, Panatch warns that rent-to-own isn’t always the ideal path to homeownership.

“We learned a lot doing it. There were some bad surprises, unfortunately,” he said.

He discovered unforeseen costs, such as his company having to bear the cost of the GST from the time the tenant moved in until he purchased the unit. Additionally, there were complex legalities to navigate. Rising interest rates also made the program more expensive, Panatch said.

“I think help from the federal and provincial levels would go a long way to facilitating a program like this,” he added.

How it works?

The terms of a lease-to-own agreement vary. In general, it is an agreement between tenants and owners or investors to buy a house at a fixed price and on a future date. The contract consists of a lease and an option to purchase.

The idea is to hold the property for the potential buyer until they can save 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 get closer to homeownership.”

Oliver says the tenant typically pays a lump sum deposit — his company typically requires $20,000 — then a monthly rent calculated on what’s needed to get them to 10% of the property’s purchase price by the end of their term. term. The monthly rent is also calculated on the cost of carrying the property at today’s interest rate.

“It’s basically forced savings. We’re selling the property in installments,” Oliver said.

Construction on the second phase of this Port Moody development wraps September 1. The developer, Panatch Group, has sold approximately 30 of the development’s 358 units on a lease-to-own basis. (Yvette Brend/CBC News)

During the rental period, the tenant is often also responsible for paying for maintenance and improvements to the home or condominium unit.

Why rent to own?

Oliver says that at the start of a lease-to-own contract, his clients can lock in the purchase price of a home, say, at $600,000 with plans to purchase in five years. If the value of the property is $650,000, the tenant can keep the additional value of the house that they have agreed to buy.

In the meantime, an investor – or, in other cases, a developer – holds the mortgage. Lease-to-own rental prices may vary, but are generally consistent with market value rentals at the time.

Oliver and her husband work with investors who take on the burden of debt until the tenant can build equity and become a first-time homeowner much faster than he could save.

Clover Properties is expanding in Alberta and Quebec given the growing need for families to secure a home before prices get too high.

Oliver says rent-to-own is best suited for tenants who are struggling to get mortgage approval due to low income or damaged credit.

She cautions, however, that the devil is in the contractual details, which is why she says she works with the buyer and the investor to ensure success and prevent investors from “being greedy”.

Comply with the conditions or lose the deposit

Oliver also notes that landlord rents must be incurred. During the pandemic, she says, some deposits lost because family breakdowns or other difficulties prevented customers from honoring their contracts and were forced to leave.

“If they stop paying on time or paying the contract amount, that would be a breach of contract. We will do our best to work with people in this situation. Once we have exhausted all options…they must leave the property and lose their deposit credits,” Oliver said. “That’s why we vet so strictly.

Also, unlike regular tenants, landlord tenants are often responsible for maintenance and upgrades.

About 30 of the development’s 358 units still under construction at 50 Electronic Avenue have been sold on lease-purchase to Port Moody buyers. Each will pay a fixed rent for two years and that money will then be converted into equity for a down payment. (Yvette Brend/CBC News)

While Oliver credits the government for exploring an unconventional home-buying tool, she’s disappointed the new federal fund is focusing on development projects and not allowing landlords to rent on the open market. for the resale of houses.

“They’re basically subsidizing the developers. Hopefully the builders will pass the savings on to the end user in a legitimate way,” said Oliver, who believes developers should work with experienced lease-to-own providers to manage the complex deals.

New path, not well tested

Rent-to-own schemes have worked in pockets of the UK, with some success, according to housing advocates.

But as is the case in major Canadian cities, properties in the UK are so expensive that it has proven difficult to bridge the gap between low wages and home ownership, and there is no there hasn’t been a huge adoption.

Paula Higgins, chief executive of the HomeOwners Alliance in London, said building safety codes were weak there and there were some problems with the finance of rent-to-own linked to new developments. Some of these units built for tenants were of poor quality as developers cut costs but still received subsidies, she said.

If Canada wants to get in on the rent-to-own game, Higgins has some advice: make sure it’s the tenant who benefits the most.

“I would be very wary of creating a developer-driven system – it helps them, not tenants.”

Higgins says it’s important that quality, affordable housing is built, not just high-end properties that attract investors and are ultimately resold for profit and ultimately exclude local families.

Gary Schwartz, president of the Lenders Association of Canada, said scrabbling for a down payment on a first home is too high a hurdle for many people given soaring house prices and inflation.

“Saving for a 20% down payment becomes too much of a burden for many first-time buyers, locking them into a rental cycle,” Schwartz said.

“It’s exciting to see CMHC developing programs that can accelerate innovation in the rent-to-own space.”

Comments are closed.