When Judy Brown (not her real name) went to her bank to see about getting pre-approved for a mortgage, the news was devastating. A recent job loss and associated expenses put the boots to her finances and credit rating.

"Come back and see us in a year – maybe," summarized the bank’s position.

Already upset and now insulted on top of it, Judy turned the moment into a tipping point in her life.

"I had had a good job, was there for years and doing well – until a company restructuring eliminated my position. And my friendly banker, with whom I’d done business for years – credit cards, car loans – turned me down flat.

"What a wake up call."

That’s when Judy discovered rent-to-own, a home-buying strategy that’s hardly new, but suddenly suited her circumstances perfectly.

Rent-to-own, also known as lease-to-own, is a buying strategy typically used 
for other consumer products such as home appliances, furniture and even cars. 
But it also exists in housing: some builders market properties to specific demographics with this method, and investor-companies specialize in using this technique to help buyers purchase their own home.

Typical rent-to-own candidates are people who, through job loss, income reduction or other personal circumstances, are unable to qualify for traditional financing. But they can also include newcomers to the country or younger people who may just lack the confidence to make such a move on their own.

Would-be buyers often have the necessary income to support a home purchase, but they lack the down payment or their credit history – a key determinant when banks lend money – is bruised or perhaps even non-existent. Take Judy, for example.

That’s where rent-to-own can be a good alternative, and can work to help renters buy their own home, whether new or resale, house or condo.

"Our clients, once approved, can pick out any property they want in the place they would like to live," says Mark Loeffler, a Toronto-based real estate expert and investor who specializes in consulting in rent-to-own strategies. He is also a licensed Realtor and author of a new book, Investing in Rent-to-Own Property. "They can choose a smaller house if that suits them, or a larger house or one more suitable to their budget."

It’s not a home-buying shopping spree, however.

Essentially, the way it works is that companies or investors such as Loeffler work with potential buyers, putting them through a thorough application process – just like banks do – that includes reviewing their credit history. If they meet the criteria and qualify to a certain purchase price point, the parties draw up an agreement whereby the investor buys the home on the renter’s behalf. That arrangement spells out the term, say three or four years, during which time the "tenant" will pay "rent" to the investor-owner, and a portion of the rent goes toward building a down payment for the tenant to use when they buy the property at the end of the term.

Meanwhile, the investor-owner works with the tenant-buyer to improve their credit and get their finances in shape to be approved for their own mortgage three or four years down the road. The agreement builds in a certain percentage appreciation for the property, which allows the investor to realize a return on his investment for buying the property on his tenant’s behalf.

The tenant-buyer, meanwhile, is basically agreeing to buy the home after the term for a pre-determined price. The appreciation rate varies depending on the specifics of the deal and the location, but in Loeffler’s case usually is anywhere from four to six per cent. If the home’s market value increases beyond that price, the tenant-buyer still buys it for the agreed-upon price, and the incremental value is considered built-up equity.

If the market declines, the agreed-upon increase is still honoured, but there are options, depending on the desires of both parties.

"At the end of the day, our goal is to get the deal done," he says.

Throughout the term, the tenant-buyer lives in and manages the property as if he owned it – including all maintenance and repairs – just like a regular homeowner. For the investor-owner, this situation is better than a traditional landlord-tenant arrangement, because in those cases the landlord is on the hook for repairs and upkeep, and tenants often don’t care for the property as their own.

It is, Loeffler says, a "win-win" strategy. The homebuyer wins because he’s able to purchase a home when regular approval channels haven’t proved successful. The investor wins because he has hassle-free management and a built-in exit strategy for his property; when he sells, he realizes his value gains and hands over the property to what to this point has effectively been a homeowner-in-training.

"Instead of the renters simply paying money each month to the landlord, they build equity in the home as they rent," he says. "Each month, a percentage of the renter’s money is saved for them to go toward their down payment of the home at the end of the rental term. And the landlord helps the renters by offering suggestions to repair credit issues, connecting them with a credit repair specialist and reviewing their credit regularly. After all, it’s in everyone’s best interests for the renter to purchase the home at the end of the lease term."

Like mortgage specialists and financial advisers suggest, Loeffler stresses prospective buyers should learn more about their credit history and manage it carefully. Get a full credit report and address any issues or inaccuracies that come up proactively – a lesson Judy learned the hard way.

Wayne Karl can be reached at wayne.karl@trader.ca, or follow him on Twitter at Twitter.com/WayneKarl