Investor responds to criticism about popular housing investment type

Following an investigation that argued rent-to-own deals are risky for tenants, one expert in that space responds.

“ … these rent-to-own agreements reside in a gray area of the law, the New York Times wrote in its report, entitled Rent-to-Own Homes: A Win-Win for Landlords, a Risk for Struggling Tenants. “An examination by The New York Times of contracts and court filings, as well as interviews with housing lawyers and more than a dozen of Vision’s customers across the country, found that these deals are risky, lack consumer protections and may not be enforceable in some states.”

The report, obviously, focuses on the American rent-to-own market. However, with so few resources about the practice, it’s likely Canadians interested in researching R2O may find it and believe the strategy is just as risky in their own market.

Jim Pellerin, an investor, coach, and owner of Innovalty Investments, told Canadian Real Estate Wealth tenants should work with reputable companies to ensure the contract benefits both tenant and renter-buyer at the end of the agreement’s term.

“A standard rent-to-own transaction is simply a Lease Agreement with an option to purchase the property at a future price,” he said. “This option is secured through an Option Agreement and is done so by the tenant paying an option consideration when the option agreement is entered into. These are valid contracts available through any licensed real estate office.”

The Times report also found many tenants are stuck with repair costs – even if they don’t end up purchasing the home.

“Most tenants walk away with nothing, having sunk money for rent and repairs into homes they had once hoped to own,” the report said. “Others faced surprise evictions, having signed a contract that did not disclose what repairs were needed, yet set a deadline for making sure the home was up to local housing code. As different tenants move in and out of the same property over the course of years, many homes fall further into disrepair.”

Pellerin confirmed rent-to-own tenants are responsible for home maintenance.

However, he argues reputable investors ensure homes are habitable and in good shape prior to the renter-buyer moving in.

“My experience is that most tenants end up purchasing the property if they are dealing with a reputable rent-to-own company. All of our properties require an onsite inspection prior to the tenant moving in. They are also strongly encouraged to conduct a full inspection by a licensed property inspection,” he said. This is a protection for the tenant and is a small price to pay to ensure the property is sound.

“A rent-to-own transaction should be viewed as if the tenant is purchasing the home and would be comfortable purchasing the home in the current condition.”
 

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COMMENTS

  • by 2016-09-07 1:09:32 PM

    If the rent-to-own ("RTO") tenant had bought the house, they would be responsible for repairs. So that objection is not a valid one. They have the option to buy, which means that in the event of a market downturn, such as happened in 1970, 1980, 1990, and which is presently overdue, (some say imminent), the tenant can walk away leaving the landlord-owner with the loss. If a burst of runaway inflation occurs, the buyer benefits with his fixed option price. So that option has real value.

    The real issue is credit. The RTO tenant has say, 3 years to improve his/her credit. Often, an RTO seller will set up the buyer with a credit specialist to help the buyer ultimately be able to qualify for a mortgage. Some RTO sellers actually provide the financing in the form of vendor-take-back financing, using wrap-around arrangements to leave existing mortgaging in place and indemnify the buyer from it.

    Although individual circumstances and arrangements are each somewhat unique, I feel that RTO is an excellent opportunity for buyers as well as sellers. Criticisms of the arrangements smack of "entitlement". The buyer has to pay for repairs, work on improving his credit, take care of the house, and think and act like an owner. If the buyer can't live up to those requirements, he is not entitled to become the owner. He isn't entitled just because he breathes.

    The RTO deals are popular, and that fact speaks for itself.

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