rent2owncalgary

[albertGQ]

Hello fellow CPers! I'm asking for expert opinions and advice here. Does anyone know much about these guys? Is this a scam? Buddy of mine from work got offered cash to basically apply for a mortgage. Once approved, he basically rents it out to a tenant under a rent-to-own contract. After about a year, the tenants apply for their own mortgage. Once approved, my co-worker would be taken off. He gets around $5000 up front for this.

From my understanding, this is legal because there is a contract written up between the tenant and Rent2ownCalgary as well as a contract between my buddy and Rent2ownCalgary. He wanted to know if this is illegal. I don't think it is, but from my perspective, it seems too good to be true. The only thing that may be in the grey area is that my co-worker has a mortgage already, but that will not be disclosed when he applies for this one, thus making qualifying easier.

Here is their link. www.rent2owncalgary.com

Just wondering if anyone has heard anything about these guys. I want to tell my buddy tomorrow to either go for it or forget it and right now, I am sitting on the fence whether this is a good idea for him or not

[Slava]

Isn't he basically renting his credit out for a year for $5k? Doesn't seem like a prudent thing to do...

[albertGQ]

Originally Posted by Slava

Isn't he basically renting his credit out for a year for $5k? Doesn't seem like a prudent thing to do...

Yeah, I guess he is. That is legal right?

Why do you say its not prudent?

[Slava]

Originally Posted by albertGQ

Yeah, I guess he is. That is legal right?

Why do you say its not prudent?

Well I am just basing this on my preconceptions (I haven't read the contract or anything like that). Basically though there is a reason that these people have to go through someone else to get the mortgage, right? They are likely paying an extra one-two percent and can't qualify for a standard mortgage...maybe its the money down, but maybe its a credit issue.

Instead though, your buddy puts his credit on the line. Maybe these people don't make payments, or maybe they make late payments. Next thing you know your buddy either owns a house and needs to sell. Or his credit is worse off.

I don't know....just to make $5k? Seriously he could borrow that money and put it in a savings account and make that same amount of money, but with no risk.

[fredr123]

Aside from Slava's concerns, sounds like it's getting close to mortgage fraud, no? I imagine if your friend is being above-board with the lender about what he's doing and they still decide to lend him the money then that's their prerogative. Go for it, I suppose. But if there are shenanigans afoot with respect to the mortgage application (ie your friend says he will be using it as his primary residence, not renting it out, etc.) then it may be a bit fishy.

For example, seems close to this:

Occupancy fraud: This occurs where the borrower wishes to obtain a mortgage to acquire an investment property, but states on the loan application that the borrower will occupy the property as the primary residence or as a second home. If undetected, the borrower typically obtains a lower interest rate than was warranted. Because lenders typically charge a higher interest rate for non-owner-occupied properties, which historically have higher delinqency rates, the lender receives insufficient return on capital and is over-exposed to loss relative to what was expected in the transaction. It is considered fraud because the borrower has materially misprepresented the risk to the lender in order to obtain more favorable loan terms.

[ken0042]

The other factor in today's market to consider is this- what happens if the value of the property drops and the guy who was renting to own just walks away from the deal?

3-10 years ago this would have been much lower risk. But now I would think that the risk would out weigh the reward.

[jolinar of malkshor]

A have a few friends that build houses. They own their own company and build about two houses a year. It is not uncommon for them to rent out the house to want to be buyers who cannot get a mortgage for a year and then do exactly what you mentioned above. The bank is fully aware of this and one of the reasons they have to rent for a year is to show the bank that they can make the payments.

From what I know it is legit. Can't say for sure about that company though.

[albertGQ]

Originally Posted by ken0042

The other factor in today's market to consider is this- what happens if the value of the property drops and the guy who was renting to own just walks away from the deal?

3-10 years ago this would have been much lower risk. But now I would think that the risk would out weigh the reward.

The tenants would have to put down a deposit, so that's their incentive to not walk away

[ken0042]

Right, but how much is that deposit? For this year I am hoping that my $340K house doesn't lose more than $20K in value. So let's say that is what it loses- if somebody is renting to own and the house is worth $20K less, and they put down $10K, there still isn't an incentive to not walk away.

And if they do in fact have as much as $10K to put down now, there would be no reason for them to go RTO, as with that kind of money you could easily assume a mortgage. So I would be surprised if their down payment is that high.

[Nabber]

Originally Posted by ken0042

And if they do in fact have as much as $10K to put down now, there would be no reason for them to go RTO, as with that kind of money you could easily assume a mortgage. So I would be surprised if their down payment is that high.

You are not allowed anymore to assume mortgages in Alberta without the banks approval. As well it seems all banks are pretty strict on the 5% down, therefore the 10,000 would only work for a property $200,000 or less, which limits you're options.

[mrdeeds]

Short and sweet, I would not touch this with a 10 foot pole. Any scheme that involves gives you a $5000 payment up front is just too good to be true. Though this may be legal there is just too much that skirts crossing the line into mortgage fraud as Fredr123 has pointed out.

If being approved by a bank as rental, this 'arrangement' may be possible but I don't know any major lender that would approve a loan knowing this was the actual situation. Right there this is fraud by non-disclosure or misrepresentation.

I would really love to see copies of the actual agreements rent2own uses and see just how they make their $$$ especially in a declining market where job losses are imminent. The risks to your friend could be huge. Obviously they would make it so the risk to themselves is minimal compared to the mortgagor and renter. It take a desperate renter and an overzealous investor to make this work.

Let us not forget it is putting people in homes en masse they could not afford that caused the whole subprime meltdown in the first place.

Here's a link to RECA's tip sheet on mortgage fraud:

http://www.reca.ca/Consumers/consume..._Tip_Sheet.pdf

Good luck!