Step-by-step tenant buyer process (Rent-to-Own, Calgary Alberta)
Danelle has an extensive background in real estate, not only as a mortgage broker but also as an investor. With more than 15 years experience as a mortgage broker, she offers her clients hands-on experience and real estate knowledge. Over the years she has experimented with different real estate investing strategies in pursuit of experience and specialization. To date Danelle has personally completed more than 20 real estate transactions; typically in some form of creative real estate investing. She’s also dabbled in rentals and flips, self-builds, long-term rentals, rent-to-own, vendor take backs, lease options, mortgage lending and borrowing. With her background, she gives clients and investors confidence knowing that in many cases she has actual experience.
How does this relate to qualifying tenant buyers?
“Let me first say that I think rent own is a brilliant strategy when done correctly…it kind of became a means for me to provide my clients that didn’t quite qualify for a mortgage today with an alternate solution,” she said. “… usually when a client is coming to me, they are done with renting so they want to be able to make the home [their] home, which is hard to do when you know that you’re just renting temporarily.”
What does the process look like?
(1) The first step in qualifying tenant buyers is to make sure that clients can reasonably reach their goal of homeownership, within a reasonable amount of time.
Example: let’s say you can’t qualify because your credit score is too low and you have five credit cards that are maxed out (debt-ratio too high.)
After reviewing the application, they determine the terms. Terms depend on qualifying for the option-to-purchase (most typically range between 2-4 years.) Tenant-buyers have to qualify to exercise their option to purchase. What that means is that of the two contracts they sign (Lease Agreement and Option to Purchase) they have to have the ability to be able to purchase. Let’s say that at the end of three years they want to back out, that means that they don’t exercise their option to purchase and they lose whatever money they put into the deal.
(2) After taking a full application and analyzing the application, the next step is putting a plan in place outlining a step-by-step action that must be completed before qualifying. Danelle would walk you through a plan that prioritizes the order you should pay debts off. This would bring your credit score up and debt-ratio down. Six months prior to the end of the term, we make sure we do the pre-qualifying to make sure that they still qualify.
(3) Similar to a coach, Danelle regularly follow-ups with her clients and completes checks quarterly to make sure that everything is on track. If something has changed, typically the investors will offer an extension on the agreement.
Example: perhaps you need more time.
The first factor that would affect the agreement is the mortgage. Since the mortgage is in investors name they must know ahead of time – because they would have to renegotiate at the current interest rate. If they have to renegotiate interest rate it can affect the agreed upon rental rate.
The other factor is that the extended appreciation added to the purchase price.
If the extension varies between 3 months or 6 months, they would need an open mortgage rate. Depending on what it is, their rent would be adjusted according to that.
On the flip side, if you look for a four-year term but end up only needing three years, there is a pay-out penalty for the mortgage. In this scenario, the tenant buyer is responsible for the payout penalty.
(4) Finally, she assists with obtaining the mortgage approval and everything right through to closing.