For Canadians on the brink of buying a home, rent-to-own can help seal the deal

Lovleen Sharma, 30, and Harsh Goyal, 32, didn’t know much about Sault Ste. Marie, Ont., when they moved there from New Delhi in July, 2020, but they knew they wanted to be homeowners. “It’s really important to pay a mortgage and own something rather than renting and helping others pay off their mortgages,” Ms. Sharma said. However, even though the married couple soon put down roots – Mr. Goyal found work in the steel industry, while Ms. Sharma got hired on a government contract – they remained stuck in their rental-apartment and were having trouble qualifying for a mortgage. “If you’re in a contract job, it’s difficult to get a mortgage,” Ms. Sharma explained.

However, this January, Ms. Sharma received a LinkedIn message from Amy Ding, founder of Requity Homes, a Toronto-based company that buys homes on behalf of renters, who then signed contracts to purchase the properties at a later date and for an agreed-upon price. Though Ms. Ding’s initial message was about advertising on the YouTube channel that Ms. Sharma and her husband created to help newcomers like them settle in the Soo, the couple realized the company’s rent-to-own option might solve their problem.

“We thought this was a good option – let’s go for it,” Ms. Sharma said.

In May, Requity purchased a two-bedroom detached home in Sault Ste. Marie for less than $300,000 and signed a contract to sell it to the couple, who contributed a 2-per-cent deposit for their eventual down payment, in a year’s time. The parties agreed on a future selling price that was 5 per cent above the purchase price, plus $5,000 to cover closing costs and taxes. Since then, in addition to rent, the couple have been paying $500 a month, an amount that will later be credited to them to further the down payment.

If, next May, the couple decides to walk away from the deal, they stand to lose about $10,000 – but Ms. Sharma is confident that he will be able to close the property when the time comes. “We are enjoying it here,” said Ms. Sharma, who notes there is an option to extend the contract for a second year. “Walking out of it is not something that we are considering.”

With ongoing housing-affordability challenges, whether from past home-price surges, inflation, or today’s higher interest rates, rent-to-own champions expect more Ontarians to follow Ms. Sharma and Mr. Goyal’s path in the coming years, although the model – which falls under the alternative-financing umbrella – has its drawbacks. “It is a bit of a gamble,” admitted Lesley Williams, who, alongside her partner, is currently a tenant-buyer, the industry term for someone who is renting to own.

Under her rent-to-own contract, she paid an investor $15,000 for a down payment on an approximately $590,000 detached home in Northern Ontario. Each month
, about $800 of her $3,900 monthly rent is socked away for the eventual down payment, something she’ll be on the hook for if she can’t purchase the house after five years (or an extension isn’t negotiated). “For sure, it’s a risk – like a lot of things in life are – but for us it was a good fit,” said Ms. Williams, who works as a primary-school teacher but has credit issues stemming from a divorce.

Ms. Williams’s scenario is common in the rent-to-own segment. A company like Clover Properties, which brokered her deal, finds investors seeking predictable returns but who also consider home ownership a social cause worth supporting. The tenant-buyers, meanwhile, tend to be people with good cash flow but who either have some credit trouble, lack a down payment, are self-employed, or are new comers to Canada.

In the case of Clover Properties, so-called impact investors agreed to a home price appreciation rate of 4.5 per cent a year upon selling, despite the fact that they could potentially earn more on the open market. “That’s the beauty of the investor families that we essentially curate: they are in this with the purpose of helping another family – it’s purpose over profit, and that’s why we got into the rent-to-own business,” said Rachel Oliver, managing partner of Clover Properties, which operates primarily in Ontario.

Simon Wong is one such investor. Together with his wife, Catherine, he has helped six families buy houses, including four through Clover, since 2016. “Getting into rent-to-own, it’s a way of giving homeownership opportunities to certain families,” Mr. Wong said. “In a way, it’s a good social cause for us,” he added. The main reason the couple doesn’t just flip the homes on the open market for a bigger profit? For one, they’ve found rent-to-own to be a surprisingly hassle-free investment that also provides them with monthly rental income. “We want to have less issues with the tenants,” Ms. Wong explained. “And we like the more consistent cash flow.”

Rent-to-own arrangements aren’t created equal. “The actual rent-to-own payment … depends on a few factors,” said Ms. Ding, citing property price, deposit size and savings goals as considerations. In certain cases, the buy-back agreement is more like a first right of refusal, where if the tenant-buyer can’t close, they get their money back after the property sells to someone who can. Occasionally, it’s used to help a homeowner facing foreclosure get back on title after a few years.

Sometimes stigmatized and considered a shady corner of the financing industry, rent-to-own agreements have evolved over the years. These days they often include a thorough screening process and credit coaching, said Mrs. Oliver, whose company partners with realtors and mortgage brokers to make sure tenant-buyers have a strong chance of success. “Rent-to-own arrangements were surfacing back in the 1970s, in the US, actually, and the main difference between what was happening back then and what’s happening now is the nature of the agreement has become a lot more sophisticated,” said Mrs. . Oliver, who, together with her husband, Neil, wrote a book about rent-to-own in real estate.

The federal government’s recently announced a $200-million rent-to-own funding stream under the Canada Mortgage and Housing Corp.’s Affordable Housing Innovation Fund – which will finance public and private initiatives – has added legitimacy to the model, supporters say. However, some in the mortgage industry argue the risks – flat out losing a downpayment deposit, for example, or having an investor go underwater – outweigh rent-to-own’s rewards.

Homebuyer hopefuls, one critic argues, are better off pursuing other options. “I’m not saying there’s not some good [rent-to-own] companies out there, but you’re fishing in a pool I would never fish in,” said Elan Weintraub, a mortgage broker and the co-founder and director at the brokerage Mortgage Outlet.

If the down payment is the only issue, Mr. Weintraub suggests taking out a line of credit. Or, he noted, some lenders may, for example, match a 10-per-cent down payment and split the equity with the borrower when the home is later sold. “There are other solutions aside from rent-to-own,” Mr. Weintraub said. Unfortunately, he added, home ownership isn’t for everyone.

Nor are rent-to-own programs. “I say, ‘No’ to 90 per cent of the applicants,” said Ms. Ding, who founded Requity in 2020. It’s not so much an affordability solution as a mechanism to help would-be homebuyers cross the last mile to ownership, suggests Ms. Oliver. “When time is of essence, a rent-to-own strategy can get people into the market faster – if they have a decent household income for the area they want to live in.”