How To Know a Rent To Own Homes Company is Credible?
Question #1: Who are these Rent to Own people and what is their reputation?
Nowadays, anybody can set up a site and offer an item or service. Anyway, who are they truly? How would you realize that they are solid and true blue? The initial phase in assessing a Rent to Own arrangement is to look painstakingly at the organization and the individuals included. Figure out who claims the organization and afterward do a Google look on them. Here are a couple of things to consider when investigating their experience:
1. Have they written anything substantive about Rent to Own via a blog or other articles? One way to evaluate the knowledge of a professional is to see what they’ve written on the subject. Ask the owner(s) for links to posts or articles and see what you think of their positions and the information they have shared.
2. What is their track record? Can you find any areas of concern?
3. Can they provide professional references? That is, real estate professionals or lawyers with whom they have worked who can vouch for their credibility? Give the references a call; they may offer more insight in person or by phone.
4. Have any of their deals not working out and if so, why? Ask them about their track record. There are always challenges in real estate investing. If someone tells you that they have never had any issues either they haven’t been at it very long or they’re stretching the truth. Find out what the challenges have been and how they have resolved the problems. Anyone can look good when things are going well. It’s the challenges that tend to expose people’s true nature.
5. Have they published a list of testimonials from people and professionals who have used their services? If all they have is a list of testimonials from “clients” with only first names or initials provided, then you don’t have much to go on. It’s better if they can give you professionals to whom you can speak.
Question #2: What is the buy-out price at the end of the Rent to Own term?
We see this constantly: People are so centred around the month to month costs that they give careful consideration to the purchase out cost toward the end of the Rent to Own arrangement. In a past blog entry, The #1 discriminating inquiry when considering Rent to Own, we took a gander at why the last price tag is so critical in figuring out if an arrangement is dependable or not. On the off chance that the estimation of the house is too high, you will be not able to get a home loan for the full esteem on the grounds that the evaluated quality will be lower than the price tag. By and large, that spells fiasco for the Rent to Own arrangement since a couple of Tenant Buyers have a few thousand dollars kicking around to put into the buy well beyond their store.
Here’s an example using real numbers to illustrate. Let’s say that a Rent to Own company states that a house you’ve moved into will be worth $300,000 at the end of three years. Three years later you turn to the bank to get your own mortgage and they, in turn, have the house appraised. Unfortunately, the Rent to Own company used unrealistic appreciation rates and the value of the house is only $285,000. The bank will only lend on a house value of $285,000. The missing $15,000 will have to be made up by you. Would you have that extra cash to put toward the purchase? In our experience, RTO clients are dealing with a number of credit and cash challenges, and the last thing they have is a lot of spare money. If you don’t pay the full price, the RTO company may insist that your option to purchase is null and void and that means that you’ve lost most, if not all, of your deposit and accrued savings.
First, ask the RTO company what appreciation rates they’re using and then turn to a Realtor to see if they are realistic for the house type you’re looking at and the specific zone in which you’re considering buying. Don’t use averages; insist on getting specific numbers that reflect the house type and the location. The ideal scenario is to have an area and house type that show strong, stable appreciation for the last five years. The appreciation rates used by the RTO company should be both plausible and conservative.
Most of the profit in an RTO deal comes from the appreciation in the value of the house which is why this is the number one area where unscrupulous companies will try to cram in profits. Add to that the fact that many clients don’t really question the final purchase price and you have a recipe for problems. In Rent to Own, you really want to start with the end in mind: Is the house price realistic?
Finally, you need to ask one more important question: What if the house price is actually lower than the agreed-upon price, even if the latter is conservative and realistic? This is real estate after all. Prices don’t always go up. What then? What protections are in place for you in this scenario?
Question #3: Will you qualify for a mortgage at the end and what is the Rent to Own company doing to help you?
The only reason that people look at Rent to Own is that they have credit and/or cash challenges that prevent them from owning outright immediately. If a Rent to Own company says that they can approve you for their program, that’s great but that’s only the beginning. The real question is, will you be ready to go at the end of the process? Here is a list of items that a Rent to Own company must provide to you in order for you to clearly understand what needs to be done to be mortgage-ready:
1. First, you need an assessment of your current situation. What are your liabilities? Do you have any outstanding credit problems that still need to be resolved? What is your Beacon score today?
2. How long will it take for you to resolve your credit issues and why? What are the lender requirements when it comes to your particular issue (i.e. bankruptcy, consumer proposal, Beacon reject, etc)?
3. Are there any errors on your Credit Bureau that need to be resolved? We see problems on a lot of files. This is a common issue.
4. What is your affordability? How much can you afford to buy given your income and liabilities? Conservative estimates should be used for all factors in evaluating affordability and you need to ensure that you can qualify for the buy-out price.
5. What will your Total Debt Service and Gross Debt Service ratios be when you buy out? Are they in line with lender requirements?
6. What Beacon score do you need by the end of the deal in order to ensure that you qualify for a mortgage? If your TDS goes above a certain level, you need a higher Beacon score. Ask if this applies to you.
7. What steps do you need to take to improve your credit file?
8. Do you have enough credit instruments and are the credit limits high enough to meet lender requirements?
By the end of the evaluation process, you should have a clear picture of where you are today, what you need to do in the next two to three years and what it will take at the end in order to be mortgage ready. If you do not know the answers to any of the above questions then ask for more information. Ensure that you have a plan. You are responsible for executing the plan but you should have clear guidance from the Rent to Own company in order to increase your chances of success.
Also – and this is important – what process does the Rent to Own company have in place to follow up with you to ensure that you’re on track? If they shake your hand when you move in and then go silent for the duration of the term, they’re pretty much relying on you to be the expert in credit repair.
Rent to Own is about so much more than buying a house for clients. It’s about helping people repair past issues in order to get to a position of strength and independence. Yes, the client has to do the work but the RTO company should be providing a clear path to follow.