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My Quest into Rent to Own

bb2

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I would like to share my rent to own experience since taking the Rapid Cash Program in Toronto in February.
First of all I want to say thanks to everyone involved, as I learned a lot and it was well worth the time and financial investment.
Since coming back to Edmonton I was very enthusiastic about trying the rent to own strategy. I have experience in real estate as I already own long term buy and holds and I have done some flips. What appealed to me about the rent to own strategy was that everyone wins - the investor makes a good profit, the tenant buyer gets their dream home and I get a good return on my time and effort.

The deals I've done so far:
1. House in Stony Plain purchase price 442,000 - buyout in a year is 455,600. They had an offer on this house when I came into the picture but were turned down by the bank because they had another house that needed to be sold. They put 45,000 down.
As it turned out they went to the credit union after I came into the picture and got qualified with them. We already had our deal so they bought me out at 455,600 a week later. I had an investor on this one so we split the profit.

2. House in Sherwood Park purchase price 480,000 buyout in 3 years 545,000. They put 3% down. They have credit issues that need to be worked on.

3. House in Sherwood Park purchase price 415,500 buyout in a year 427,965. He put 5% down. He just needs to sell a house and should be able to qualify himself.

4. House in Grande Prairie - another situation where they were approved by bank buy declined by CMHC. Should only need a year to qualify themselves. Purchase price 295,000 buyout 308,275. They are also putting 5% down.

5. Townhouse in Dunce just putting in an offer tonight. 190,000 purchase price. The tenant buyer is already approved. I've been working with her for awhile. She is moving from the State to be closer to her family and is putting 4% down. Will need maybe 2 years to qualify herself. I may do this one myself as the amount to put down is quite small - 30,000.

I've used investors on 4 of these. The return to them is at least 20% per year making it a much easier sell, as the ROI is set from the beginning and it's a shorter investment period.
It's been a lot of work but WOW so rewarding when you are able to help someone out that thought they hit the wall.

Thanks
Brenda
 

neill

Airdrie, AB
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Oct 22, 2007
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Congrats! It will be interesting to see if deals that were previously inked that have maturities due this year and next, have option prices that are supported by the appraisals.

Our most recent example is a townhouse with comps in the same complex at 295-300. We had an option to purchase of 319,990, and the first appraisal came in at $270k. The second at $280k. We are in discussions with the tenant to figure out how to still create success...
 

bb2

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Yes that is a factor I have considered with the type of market we are in. I have used modest appreciation rates, but there is the risk that properties may actually go down in value. Yikes!
I have discussed the possibility that the property may not appreciate at the end of the term with the tenant buyers and have given them options if this happens.

Thanks
Brenda
 

Sherilynn

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I have discussed the possibility that the property may not appreciate at the end of the term with the tenant buyers and have given them options if this happens.
Good foresight, Brenda!
 

hope

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What would the options be for the tenant buyers if the property depreciates?
Thanks!
Hope
 

Sherilynn

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If the depreciation is a temporary blip (as often happens in a "W" recovery), you could renew for 6 months and try again. The only issue here is you would now be making no appreciation for the extra 6 months, so ROI would decrease.

Another possibility (and what we have done) is to reduce the price slightly (out of the RTO expert's share, for the most part) and then sign a promissory note for the shortfall, usually with a monthly payment arrangement. Everybody wins.

Of course, the tenant could choose to walk, but then he forfeits his option payment and you are stuck with a house that you can't sell for what you need to get. So you're better off with a slight price reduction and the note for the rest. Yes, there is a risk the buyer will default on the note, but if you have properly screened for an excellent tenant, then this risk is minimal.
 

DonCampbell

Investor, Analyst, Author, Philanthropist
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I would like to share my rent to own experience since taking the Rapid Cash Program in Toronto in February.

Congratulations. It is stories and experiences such as this that make it clear that with the correct 'reality-based' continual education we all as investors can become transaction engineers.

Building both a long-term portfolio as well as quicker-turn properties. As economies shift, the strategic investor seizes opportunities.

PS I believe the final "Rapid Cash" program for the year is being hosted in BC in September (http://s.reincanada.com/www/store/detail/Rapid-Cash-Flow-Program-BC-2) and still include the 6-month follow-up coaching.
 

neill

Airdrie, AB
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What would the options be for the tenant buyers if the property depreciates?
Thanks!
Hope
Hi Hope,

Sherilynn is correct. Small second mortgages or note payables may come in to play a whole lot more.

In our example above, we agreed to drop the price from 319,990 to 299,990 plus took a $10k note payable attaching to future property (ie. the property that the tenant is closing on), effectively splitting the difference between today's value and their option. The $10k will take quite a while to collect, but it becomes long term cash-drip (not cash-flow, lol).

Fortunately, we had not purchased the property at current market value today - we rarely will do what are called "tenant first" deals (aka buy a house at retail price today and mark it up - hoping that the market goes up is not a good business strategy). The property itself had been a sandwich lease (we leased from the seller and in turn re-leased it out to an RTO tenant) that we had an option to purchase for the declining balance of the mortgage - property was slightly underwater at the time that we leased it, and subsequently re-floated. The owner subsequently declared bankruptcy (gulp!), and we had to go to court to buy it and protect both the tenant's and our rights to the property.

There was more than one RTO investor that got hurt financially back in the last dip in AB prices in 2009-10
 

Sherilynn

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The property itself had been a sandwich lease (we leased from the seller and in turn re-leased it out to an RTO tenant) that we had an option to purchase for the declining balance of the mortgage - property was slightly underwater at the time that we leased it, and subsequently re-floated. The owner subsequently declared bankruptcy (gulp!), and we had to go to court to buy it and protect both the tenant's and our rights to the property.

Some people would argue sandwich leases are not a good business strategy for reasons such as this. ;)

Tenant-first RTO is a good strategy but has risks, as does any business venture. One must hope for the best but prepare for the worst.
 

neill

Airdrie, AB
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Agreed that sandwich leases potentially carry more risk - although having had an AFS seller also file for bankruptcy (there's a reason they agreed to the AFS in the first place), the sandwich deal was almost easier to pull out, as we were able to deal directly with the bank's lawyer, and not with a bankruptcy trustee.

A caveat on title is highly recommended in either case - notification is everything, lol
 

bb2

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What would the options be for the tenant buyers if the property depreciates?
Thanks!
Hope
1. Renew option for a year or so and wait for the market to recover
2. Tenant-Buyer takes a second mortgage for the difference
3. Tenant-Buyer pays cash for the difference
4. I reduce my profit
5. Combination of the above

Brenda
 

bb2

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As suggested by Sherilynn note payables are also a good option.
 

Sherilynn

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1. Renew option for a year or so and wait for the market to recover
2. Tenant-Buyer takes a second mortgage for the difference
3. Tenant-Buyer pays cash for the difference
4. I reduce my profit
5. Combination of the above

Brenda
Choice 1 is tricky with a JV partner as the increased time for the same amount of profit will seriously degrade ROI. Plus there is no guarantee the market will recover in a year, so then what?
Choice 2 is unlikely as most RTO buyers have 10% down (or less), so they will not be able to get a second from the usual sources. Plus CMHC won't allow the official purchase price to be higher than the CMHC-appraised value, so a second cannot be registered on title if the mortgage is insured.

A combination of choice 3 and 4 coupled with a promissory note is usually the best, especially with a JV involved. Cutting your amount of profit and getting out now helps maintain your partner's ROI. Everyone wins.
 
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