On October 6, the day the TSX tumbled 1,106.95 points, Jon Murray’s phone was ringing off the hook, as it has been for the past six months. The real-estate consultant specializes in helping people—whom the banks won’t touch due to poor credit, recent immigration, lack of income proof, or other reasons—buy their own homes. The strategy is called a “lease option”, otherwise known as “rent-to-own” homes. The creative financing thrives in an economy when home sellers are having trouble selling and buyers face a risk-averse mortgage industry.

“All day, every day, I’m on the phone because so many people want to do it,” Murray told the Georgia Straight, noting that about 100 realtors in B.C. are negotiating these leases. “Just in the last six to nine months, the lease-option market is starting to get really hot because there’s lots of houses not moving.”

The privately contracted deal is pretty simple. The buyer puts up about five percent of the price of the home to “secure it”. Then he or she moves in. Over a period of about two years, the buyer pays an inflated “rent”, part of which goes toward equity in the house. At the end of that period, if everything goes well, the buyer gets a traditional mortgage from the bank.

For example, at www.strategichousing.ca , which specializes in lease options, a seven-bedroom home with two suites in Surrey can be leased for $2,840 a month. Of that, $950 per month goes toward equity. The rest, $1,890, is considered rent.

Although lease options are relatively new in Canada, San Francisco–based real-estate agent John Reed has watched them for about 25 years. He wrote about them in his 1998 self-published book, Single Family Lease Options, now in its fourth edition.

Reed thinks they should be illegal.

“It’s generally a scam down here,” he told the Straight on the phone from his home in Alamo, California. “In 90 to 95 percent of cases, the lessee never exercises the option to buy. So they lose the front-end money, which was $5,000 to $25,000, and they lose the rent they paid.”¦It’s a heavy-duty outrage.”

Reed notes that even though lease options are somewhat regulated across the U.S., with 45 states with statutes in place and two federal laws pending, most buyers who get involved don’t have the wherewithal to fight for their rights when the deals sour.

“They think they’re just tenants,” he said. “So when they get evicted for being a day late with their rent, the agent gets to keep $30,000. They are preying on unsophisticated newlywed couples.”

In Canada, lease options occupy a hazy legal zone. They’re not covered by the Real Estate Act, according to Anthony Cavanaugh, the communications officer with the Real Estate Council of B.C. In addition, they’re not covered by the Residential Tenancy Act, according to Tenants Rights Action Coalition spokesperson Tom Durning.

“If it sounds too good to be true, it probably is,” Durning told the Straight. “You should get a lawyer before you sign anything, and you’re crazy if you don’t. With five percent down and these low interest rates, why rent to own?”

According to strategichousing.ca/ owner Andy Santoso, the reality in 2008 is that 40 percent of Canadians don’t qualify for a traditional mortgage. That’s where lease options can help.

“Home ownership elevates your social and financial well-being,” he told the Straight, explaining why that 40 percent shouldn’t be content to just rent.

Sam Ryan, owner of www.lease2ownbc.com , told the Straight he researched lease options thoroughly before opening his business this May. Since the market slumped, he noted, interest is booming.

Given the Conservative government’s cancelling of the zero-down, 40-year mortgage as secured by the Canada Mortgage and Housing Corporation, he said, “people are more concerned about being able to get into a property rather than the actual price of it, as long as their payments are affordable.”

Murray, owner of Jowen Investments and Consulting Group ( www.jowen.ca ), admits that there can be problems with unethical lease-option agents. Individuals should protect themselves, he suggested. But in a market where the banks are cracking down on who can borrow, he said, lease options are certainly the present reality, and they may be the future, too. -