A number of mortgage brokers are among those applying more scrutiny to rent-to-own deals following yet another investment horror story.
The viability of the rent-to-own market took another hit last week following news that an Ottawa-based company is facing $2 million in lawsuits from unhappy investors. Golden Oaks Enterprises, the company at the centre of the scandal, had reportedly promised high returns in exchange for loaning cash and investing in the property.
“Stories like these do scare buyers from this market,” says Deepak Bansal. “From my own experience, there have been a lot of bad rent-to-own developments and this is just another. There are some good obviously, but the risks and costs in general are too high for many.”
Elizabeth Kelly, VP of Sandstone Management Inc, says all industries have “bad apples” and as with all home purchases, buyers need to carry out substantive research and due diligence beforehand. The same applies to property investors considering this platform as a way of diversifying their portfolios.
Still, much of the criticism of rent-to-own is focused on the buyer/renter. Those agreements are increasingly touted as a good alternative for those who cannot afford a down payment or have poor credit ratings or are unable to qualify for a high-ratio mortgage under the new mortgage rules, introduced one year ago.
“The main flaw in this market is how some developers are valuing the property once the rent-to-own term has finished,” warns Bansal. “I am aware of some cases where, for example, after three years of paying into the fund, the developer turns around and says the property’s value has gone up by 20,000 to 30,000.”
Kelly, however, says such cases only arise when legal issues are not ironed out from the start.
“Education and communication is central in rent-to-own, especially when it comes to the application process,” she says. “The only problems I have seen with regards to this market are when people sign up for a rent-to-own informally and no agreements are in place.”
Source: Canadian Real Estate Wealth Magazine