Property First vs. Tenant First Rent to Own
HOS Financial came about as the result of our desire to help people on both sides of the real estate equation come together for their own mutual benefit — people wanting to leave the rent cycle behind and own their own homes for the very first time, and people with money to invest and a desire to make returns well above the pittance that government-backed savings vehicles provide, without the level of risk that comes with putting money into the stock market or into bonds.
In the wake of the 2008 financial collapse, lending guidelines tightened significantly. Potential borrowers had to provide considerably more documentation of income history, employment background and other metrics that go into a bank’s lending decision, such as the potential borrower’s credit score. While this did cut down in the number of defaults going on in the system, it also meant that a lot of people who had the means to make regular mortgage payments were frozen out of the loan application process.
A lot of people still don’t really understand how “rent to own” works, or how it can work for them. There was a time when the only place you found “Rent to Own” listings was on the very inside back cover of the real estate classified section; the only sellers willing to consider this sort of arrangement were the ones who had not yet been able to sell their property in any other way, and the only borrowers who went for it were the ones who had not been able to get bank approval that would give them a conventional loan but wanted to get into a house and start moving toward home ownership, even if that home weren’t quite ideal.
With a new century has come a new model of rent-to-own contracts, and HOS Financial stands as one of the most innovative providers of this type of financing. Our in-house program is called the “Tenant First” program — and this is a paradigm that we developed.
Here’s how it works. When a borrower applies to start a lease purchase contract, they gives HOS Financial their information (salary history, assets, credit report, and any other necessary documents). Once we figure out how much you can spend on your home, we then help you find the home that “you” want. We connect you with an in-house Realtor, who will help you get through the day-today process of completing your real estate transaction.
Instead of the borrower driving around and finding a house (that’s the Property First model) and then trying to get a deal on it, you get to choose the home. When new FSBO (for sale by owner) or any “for sale on MLS” home comes on the market, you have a chance to swoop in and get it, provided that you already have an approved application on file with HOS Financial. We assign you to a Realtor, and they find the home that you want — instead of looking through a dusty list of rent to own properties.
Once the borrower has found the home that they want, we then negotiate the purchase of the home. During the term of the lease purchase program, the Investor will own the house, but the borrower(tenant) gets to move in. The borrower pays a starting Down Payment/Security Deposit and they then start paying lease on the home. In addition to that rent payment, they also gives us some money to put into an escrow account, called Option Credits which will later form part of the final down payment.
This is why our program is considered so customer-centered. We tailor the whole program to the needs of the tenant. The borrower/tenant picks the house that he or she wants to rent — and then before they move in, they sign a Purchase and Sale agreement to buy the home at the end of the lease. He or she also gets a personal contact within HOS Financial who will help the borrower make sure that he or she knows exactly what to do to improve the credit score to the point where the banks will give out the Exit Mortgage at the end of the lease term. Obviously, they still have to follow the plan, but HOS Financial follows up with Tenants to help them stay on track.
Does this sound too good to be true? Over the past 15 Years, we have actually put together a “great” track record for both new homeowners and new real estate investors. It’s actually a lot much more “Tenant Focused” than the old way that Rent-to-Own used to work.
How did “Rent-to-Own” originally work? Potential borrowers look through those real estate listings at the back of the newspaper (or, in a digital age, down the listings for local real estate online). Under the “Rent-to-Own” section, they might find a few listings, usually in a part of town where they had never thought about living. The people listing these properties had likely had them on the market for the better part of a year, if not more, but they had not been able to sell them for anything approaching the value they wanted. So, they decided to use this option to make some additional money off the year or two that a hard-to finance borrower would rent it before you buy it outright. They’re on the path to home ownership, but it isn’t a path they would have chosen ideally — it doesn’t lead to a house that they would have chosen for themselves. This type of Rent to Own program was normally a House-First or Sandwich Lease program.
In addition to the above, there were also, Tenant First Rent to Own Programs available before CMHC came along to insure Mortgages up to 95% Loan to Value. One time, banks only issued Conventional Mortgages and clients were asked to put down 20%. If they did not have 20%, they would consider a Rent to Own program which allowed them to accumulate the required 20% down to get a Bank Mortgage. The houses were chosen from properties for sale in the market and were considered Tenant First Program which normally have the highest success ratio.
There are quite a few rent to own companies that you can choose from if you want to enter this market as an investor. At HOS Financial, we have a Diamond membership in CAROP, and we have been established since 2002. We have put together more than $250,000 million in real estate transactions and have executed over 750 Tenant First Rent to Own Programs. Our reputation for service speaks for itself, and we have many references at every real estate price point that we can forward to potential investors to contact as you decide whether or not to take part in our program.
There are two different models that investors can use to enter the rent-to-own market. One is the “Property First” model. This is for people who have a home that they would like to sell through a rent-to-own scenario. Obviously, you’re taking a risk if you’re not working hard to attract the sort of tenant/borrowers who are likely to qualify for a bank mortgage at the end of the lease term, and that will represent a solid investment for them over time. However, given the vagaries of the real estate market, many investors have a house that they would like to augment their earnings from the eventual sale of the property by starting out with it as a lease. Not only can you make two or three years’ worth of rent from the property — at the top of the local market — but you also get the security of a sale price normally agreed to at the start of the lease. That way, you’re protected if the market drops over the course of the lease term. However, the success rate with “Property First” rent-to-own is estimated in the market to be 10 percent. The primary reason for this is that the investor rarely has the expertise and there is rarely a structured Support System to help the borrower-tenant qualify for a mortgage at the end of the term. At that point, if the tenant does not secure an Exit Mortgage, the tenant loses the initial deposit and those payments on top of rent that were supposed to go toward that eventual down payment — a situation that can become quite unpleasant for all involved.
At HOS Financial, we use a “Tenant First” model. People come to us who want to initiate a lease purchase program and leave the rent cycle behind. We can match them with any house that is for sale; if you have a house you want to sell (and it meets our guidelines), you can sell your house this way. However (and this is how the vast majority of our investors work), you can put investment funds toward the purchase of a house that a tenant has identified as the one that he or she wants to move into. If you don’t have the funds to purchase an entire house, you can join in with other investors to Joint Venture and own the house together.
We find (and screen) the tenants. We administer the program. We know what the borrower/tenants need to do to qualify, and we help them to stay on track. You invest your funds, and you collect monthly Cashflow and profit from sale when the borrower/tenant purchases the house at the end of the term. You can then re-invest it in another property, or you can walk away with the money you made.
Our program has helped many Investors make great “passive” income — and we have also helped a lot of consumers escape the rent cycle. We stand ready to answer all of your questions — and to help you become the next satisfied investor with HOS Financial. Give one of our investment experts a call today — and we will help you get started on the road to real estate profits.