The rental agreement that Davis Leke signed three years ago didn’t look much like the ones most Ontario tenants arrange with their landlords.
Of the $2,050 he and his partner, Nicollette Evans, were to pay each month for a one-bedroom waterfront condo in Ajax, $380 would be set aside for something else: a down payment that they could use to purchase the unit at an agreed-upon price after three years of tenancy. “I’m a big advocate of it,” says Leke of the deal, which he and Evans made in March 2018.
This spring, the couple took possession of the 780-square-foot unit after having purchased it from their landlord for $347,000 and qualified for a mortgage of their own. What Leke and Evans did is a version of a rent-to-own plan. While such arrangements have historically been uncommon, the Liberals make mention of them in their housing plan (they do not appear in the NDP or Conservative platforms). “I do think the government should be involved,” says Leke of supporting rent-to-own initiatives. “It should be about people who want to own — I think we should put money in their pockets to be able to afford [housing] and just support [them].”
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So how does rent-to-own work, and could it actually turn more Canadians into homeowners?
“Under a typical rent-to-own model, an individual commits to renting a property for a period of time with the option of buying it at a locked-in price before the end of the lease, to allow them to save for a downpayment,” the Liberal party’s website states. If elected, the party says, its government would dedicate $1 billion toward rent-to-own initiatives.
In Canada, rent-to-own housing dates back to at least the ’70s, according to Rent to Own Essential Guide for Homebuyers: The Key to a Fresh Start and Richer Future. “Back then, the agreements may have been more casual and the terms a bit looser,” says Rachel Oliver, who co-authored the book with her husband, Neil. (Together, they run Clover Properties, which for the past 12 years has been connecting local investors with Ontarians — including Leke — who are interested in renting to own a property.)
Yet some 50 years later, rent-to-own remains a niche option. “It’s a pretty small segment overall,” says Peter Norman, chief economist at Altus Group, a real-estate consultancy. “I think that if you’re going to find any data or any information out of it, it’s going to be anecdotal.”
What rent-to-own programs already exist?
Getting the government involved in a national rent-to-own program would be unprecedented in this country. But options already exist on the private market across North America, including in Ontario. Rachel says that her business, Clover, has worked with more than 500 families on rent-to-own setups across southern Ontario, primarily focusing on more affordable markets outside Toronto proper: “We get a lot of people misunderstanding what rent-to-own is — and isn't — and our definition of it: it's really a solution for good-income earners that have saved a little bit of a down payment but are having some credit challenges and are getting turned down by the banks.”
The homeowner-hopefuls that Clover works with fork over what amounts to a 5 per cent down payment to the current owner, who pays a fee to the company for brokering the deal. Then, over the course of a three-year term, part of each month’s rent is added to the deposit with the goal of doubling it in order to more easily secure future financing.
The homeowner is contractually bound to sell the property, but if the renters still can’t purchase at the end of the terms laid out in the contract — which is signed in addition to a conventional lease — they forfeit all but 10 per cent of their deposit, unless the timeline is extended, which has happened. “We have a 90 per cent success rate,” Oliver says. “One in 10 doesn't succeed with the process, because, generally, they have a disruption in their marital status, a divorce, separation, or a job loss — those are the things we can't often help.”
In British Columbia, Bosa Properties use a different model. Through the Bosa Equity program, 25 per cent of a tenant’s total rent paid during their leasing period can be put toward a new unit in a Blue Sky or Bosa development, up to two years after moving out. “We are seeing a new type of renter — one who is very selective in their wants and needs. They view renting as their long-term mode of living and not simply a stopgap to home ownership,” says CEO Colin Bosa in an email statement. “Within that group there are those who are pursuing the rent-to-own scenario — Bosa Equity. This is a newer concept and it is being embraced slowly.”
Why would developers and investors get involved with rent-to-own?
The Liberals’ billion-dollar commitment would come in the form of loans and grants for private companies, not-for-profits, and co-ops to develop new rent-to-own projects. But how do you get the developers to buy into such a scheme? “That's a good question,” says Norman. “For your typical bread-and-butter condo developers, you basically want to get in and out; you want to sell all those units, and you want to get yourself out of that property as quickly as you can.”
Whether the homebuilding industry would embrace the Liberal proposal would come down to the specific numbers, says Diana Petramala, a senior economist at Ryerson University’s Centre for Urban Research and Land Development (a Liberal party spokesperson confirms the program is still in the planning stage). But Petramala sees incentive for such real-estate ventures in cooler housing markets. “For the developer, it helps them work down their inventory so they can find the demand for any potential inventory that they have that they can’t sell,” she says. Both Petramala and Norman note rent-to-own gained some popularity stateside following the 2007-08 financial crisis, when developers were scrambling to offload units in projects that were too far along to cancel.
A spokesperson for the Liberals tells TVO.org in an email that there won’t be a one-size-fits-all structure for the program and that the earmarked money should be enough to encourage participation from a variety of groups: “We are confident that, by partnering with municipalities and providing substantial federal funding, we will be able to incentivize the building of new rent-to-own units across the country.”
There are a few reasons investors choose to get involved with rent-to-own through Clover, Oliver explains. The landlords they work with are typically buying a secondary property, looking for a stable return on investment, hoping to avoid the hassles of finding reliable tenants, and interested in making an investment that will support home ownership, a cause they believe in. “They want to invest with a purpose,” she says, adding that Clover has turned away big investors who were too profit-driven and seeks to provide housing at below-market rates while still ensuring sellers take home a profit.
The drawbacks of rent-to-own
Early rent-to-own deals might have been done by handshake or verbal agreement, or didn’t account for a prospective buyer’s financial situation, Oliver says, and this has somewhat stigmatized these types of agreements historically. “That’s what gets everyone in trouble — not thinking far enough down the line before anyone signs on the dotted line,” she adds, noting that this leaves the door open to a tenant not being able to afford to purchase the property later.
Although details about the proposed federal program are thus far scant, Norman is skeptical about its ability to be an effective affordability measure due to what he suggests is its limited scope. “First of all, it’s not a lot of dollars,” says Norman. “The magnitude of this [rent-to-own program] is pretty small, even in comparison to their current commitments to subsidized housing. It seems like it’s more politics.” More effective, he says, would be giving renters in need direct monthly subsidies.
Petramala also suggests the current economic climate could make rent-to-own riskier. “I think there are a lot of concerns over inflation and potential for interest rates to go up,” she says. “The longer the lease term, the more likely that they’re actually going to be facing higher interest rates when it comes time to buy, when they want to mortgage it.” Uncertainty is one of the reasons rent-to-own hasn’t taken off to date, Norman suggests. “One of the reasons why it hasn’t been that prevalent and not that common is that it’s just not that clear that it’s in the renter’s interest to get into these contracts.” He notes that the portion of rent set aside for the down payment amounts to a premium. “It’s a little bit like leasing your car — if you run the numbers on that, it’s often a lot less affordable than actually buying one; all it does is provide you an opportunity not to have to put all the money up front.”
While Leke is a supporter of rent-to-own, he acknowledges it isn’t for everyone. “You have to know what you’re getting into,” he says. “You need to be disciplined.” Oliver says that, while “a lot of people feel that you can rent-to-own if you can’t afford real estate,” that’s not the case — people still need to be in a financial position to absorb the ownership costs when they exit their lease: “Somebody still has to carry the property.”
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