About 10 percent of the 358 units in the development still under construction at 50 Electronic Avenue were sold as rentals, meaning buyers pay a fixed rent for two years, which is then converted into equity. Fracchia, a 28-year-old software developer, has an appointment as of now to tour his new one-bedroom apartment near the SkyTrain and a waterfront park. All for $10,000 down and $1,000 a month in rent, which goes toward a down payment on the $470,000 part over two years. “It’s basically like free rent for two years. That money [I pay now] I’ll keep it as I go along with the sale,” said Fracchia, who will move in with his wife in a few months. Christian Fracchia and Persephone Lavender will soon be moving into their rental apartment in Port Moody, BC, after four years of waiting. Fracchia won a lottery after more than 500 people bid on a chance at about 30 one- and two-bedroom units within walking distance of Rocky Point Park. (Submitted by Christian Fracchia) Rent-to-own is a unique path to home ownership that delays one of the biggest hurdles for new homebuyers – the hefty down payment. Proponents say this home financing model allows people with limited or damaged credit who can’t qualify for a traditional mortgage to work toward homeownership. However, critics warn that rent-to-own is untested and has some pitfalls and risks – such as maintenance costs or the possibility of losing the deposit, in some cases, if a tenant does not fulfill the terms of the agreement. Canada is funding more projects like this, creating a rental housing program as part of a $2 billion spending spree to double housing construction over 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 and affordable housing projects.
$200 million rent in same fund
Of that $2 billion, $200 million is earmarked for a new rental program. This fund, managed by Canada Mortgage and Housing Corp. (CMHC), will encourage developers and builders to create more opportunities for first-time homebuyers overwhelmed by down payment requirements, Prime Minister Justin Trudeau said at a news conference in Kitchener, Ont. , on August 30. “For many renters, saving up to buy a home is increasingly difficult. Through this new program, we will work with housing providers to help families transition from renting to homeownership,” Trudeau said. . Applications for the five-year Affordable Housing Innovation Fund and its new rental stream opened Aug. 30 to municipalities, developers, builders, community housing organizations, nonprofits and Indigenous organizations. Prime Minister Justin Trudeau was in Kitchener, Ont. on Aug. 30 to unveil a plan to add a total of 17,000 new homes across Canada. (James Chaarani/CBC) In 2018, when the Panatch Group offered freehold units in Port Moody, 500 people applied. Developer Kush Panatch of Richmond, BC, said he had never offered a rental before and was shocked by the strong interest. He ended up inviting only Port Moody applicants in a kind of lottery after reviewing essays — including one from Fracchia, who wanted to stay in the community he loved. While exciting, Panatch cautions that renting isn’t always the perfect path to home ownership. “We learned a lot doing it. There were some nasty surprises, unfortunately,” he said. He discovered unexpected costs — such as the fact that his company had to bear the cost of GST from the time the tenant moved in until he bought the unit. Also, there were complicated legalities to navigate. Rising interest rates also made the program more expensive, Panatch said. “I think some help from both the federal and provincial levels would really go a long way in facilitating a program like this,” he added.
How does it work;
The terms of a rent-to-own agreement vary. Generally, it is an agreement between tenants and property owners or investors to purchase a home at a set price at a future date. The agreement consists of a lease and an option to purchase. The idea is to hold the property for the prospective buyer until they can save enough to qualify for a conventional mortgage with a lending institution. Rachel Oliver of Clover Properties north of Toronto runs a private rental program that she says has helped 600 Ontario families “fast track their ability to get closer to home ownership.” Oliver says the tenant generally pays a one-time down payment — her company typically requires $20,000 — and then a monthly rent calculated at what it takes to reach 10 percent of the property’s purchase price by the end of their tenure. . The monthly rent is also calculated on the cost of transferring the property at today’s interest rate. “It’s basically a forced saving. We’re selling the property gradually,” Oliver said. Construction wraps up on the second phase of this Port Moody development on September 1st. The developer, Panatch Group, has sold about 30 of the 358 units in this development as rentals. (Yvette Brend/CBC News) During the rental period, the tenant is often also responsible for paying for maintenance and upgrades to the home or apartment unit.
Why rent to own?
Oliver says that at the start of a rental agreement, her clients can lock in the purchase price of a home at, say, $600,000 with plans to buy in five years. If that property value increases to $650,000, the tenant must keep the additional value of the home they agreed to purchase. Meanwhile, an investor — or, in other cases, a developer — owns the mortgage. Rental rates for rent-to-own agreements can vary, but are generally in line with current market value rents. Oliver and her husband work with investors who take on the burden of the debt until the renter can build equity and become a first-time owner much faster than they could save. Clover Properties is expanding into Alberta and Quebec given the growing need for families to own a home before prices rise. Oliver says rent-to-own is best suited for renters struggling to get approved for a mortgage due to low income or damaged credit. He cautions, however, that the devil is in the details of the contract, which is why he says he is working with the buyer and investor to ensure success and avoid investors “being greedy.”
Meet the terms or lose the advance
Oliver also notes that rentals to landlords must be bound. During the pandemic, he says some lost advances because family separations or other hardships meant clients couldn’t honor their contracts and were forced to walk away. “If they stop paying on time or paying the contract amount, that would be a breach of contract. We’re going to do our best to work with people in that situation. Once we’ve exhausted all options … they have to vacate the property and they lose their down payment credits,” Oliver said. “That’s why we’re pitching so hard.” Also, unlike regular renters, rent to owners are often responsible for maintenance and upgrades. About 30 of the 358 units in the still-under-construction development at 50 Electronic Avenue have been sold as rentals to Port Moody buyers. Each will pay a fixed rent for two years, and that money is then converted into equity for a down payment. (Yvette Brend/CBC News) While Oliver gives the government credit for exploring an unconventional housing purchase tool, she is disappointed that the new federal fund is focusing on development projects and not allowing landlords to shop the open market for resale homes. “They’re basically subsidizing developers. Hopefully, developers will pass the savings on in a legitimate way to the end user,” said Oliver, who believes developers should work with experienced rental providers to manage complex deals.
Pioneering route, not well tried
According to housing advocates, rent-to-own schemes have operated in pockets of the UK, with some success. But, as with major Canadian cities, UK real estate is so expensive that bridging the gap between low wages and home ownership has proven difficult, and there hasn’t been a huge uptake. Paula Higgins, chief executive of the HomeOwners Alliance in London, said building safety codes there were weak and there were some problems with rental finance linked to new developments. Some of those units built for renters were of low quality as developers cut costs but continued to collect subsidies, he said. If Canada wants to get into the rent-to-own game, Higgins has some advice: make sure it’s the renter who benefits the most. “I would be very wary of creating a system that is driven by developers — that helps them, not the tenants.” Higgins says it’s important to build quality, affordable housing, not just high-end properties that attract investors and end up being resold for a profit and ultimately displacing local families. Gary Schwartz, president of the Canadian Lenders Association, said clearing a down payment on a first home is too big a hurdle for many people, given that home prices and inflation are steep. “Saving for a 20 percent 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 rental space.”
