Combining a JV with Rent to Own

[dleischner]

Good afternoon,I am currently exploring the "Rent to Own" path. So basically this is a two part question.

1.) I think I understand the basic structure of the rent to own structure courtesy of homeownersoon.com.
Benefits of this Program:

[*]Your purchase price is guaranteed, even though you will not be exercising your option to purchase the property for another year or two. [*]You start to participate in equity appreciation right away. Your monthly payments and down payment are affordable. Easy Qualifying! Your credit bureau is not a factor in our decision. How The Program Works:

For our Rent to Own Program, a small down payment is required. The down payment can vary depending on your home selection. The down payment is credited to you as a deposit and will form part of your overall equity in the property.

Your monthly payments comprise of a Rent payment, as well as Monthly Option Credit payment (typically 20% of your rent payment). The Monthly Option Credits are saved over the lease term and are credited towardsnegotiable the purchase price. This example is based on a purchase price of $200,000. Please note that these numbers may vary depending on your city and Province.

Initial Down payment$5,000NegotiableMonthly Chq #1$1,360Rent, FixedMonthly Chq #2$340 Monthly Option Credits, negotiable Total monthly payment$1,700 Lease term2 years1-3 years negotiableAgreed to Purchase Price after lease period$231,080 Down payment saved over lease period$8,160$340 x 24 monthsTotal down payment paid $13,160$8,160 + $5,000 (initial down payment) Amount owing to purchase house after 2 year lease$217,920This amount could be financed with a first mortgage from bank or other lending company
2.) The thing I`m not entirely clear about is how would I combine this with a JV Partner? Plus how do you structure the legal side of things. I guess there`s the JV agreement (have one already), but what about the "Rent to Own" portion?

3.) Do people actually go for deals like this? It doesn`t seem like a very good deal paying rent for two years and owing an addtional $17+K at the end of the two years.

Lots of questions...... Thanks Dean

 

[brad]

3.) Do people actually go for deals like this? It doesn`t seem like a very good deal paying rent for two years and owing an addtional $17+K at the end of the two years.

Lots of questions...... Thanks Dean


It would be YOU collecting to monthly rent cheques/lease option payments PLUS and additional 17K if the tenant follows through with purchase.


Brad

 

[dleischner]

QUOTE (brad @ Mar 10 2009, 06:40 PM) 3.) Do people actually go for deals like this? It doesn`t seem like a very good deal paying rent for two years and owing an addtional $17+K at the end of the two years.

Lots of questions...... Thanks Dean


It would be YOU collecting to monthly rent cheques/lease option payments PLUS and additional 17K if the tenant follows through with purchase.


Brad

Right, sorry that makes sense after I read it again. Does anybody know the best option how to combine this option "Rent to Own"with a JV Partner?

 

[RedlineBrett]

with CMHC insured 5% down mortgages and interest rates being so low rent to owns are a tough sell.

Also - setting the future value is very difficult in a declining market... if the tenant/buyer doesn`t have confidence that the price of real estate is going to go up significantly the margins just aren`t there to cut you in for a good profit.

Also, they CAN`T buy for more than it is worth if they don`t have the cash. The property has to appraise properly for them to get a mortgage.

I would think twice about starting up an elaborate RTO program in this market. I am thanking my lucky stars we got GOOD sized deposits (10k+) from our current tenant buyers. They aren`t going to be able to close at the end of their term though and I`ll more than likely have to cut them a serious break or see if I have it in me to kick them out and keep their deposit...

QUOTE (brad @ Mar 10 2009, 05:40 PM) 3.) Do people actually go for deals like this? It doesn`t seem like a very good deal paying rent for two years and owing an addtional $17+K at the end of the two years.

Lots of questions...... Thanks Dean


It would be YOU collecting to monthly rent cheques/lease option payments PLUS and additional 17K if the tenant follows through with purchase.


Brad

 

[lanedry77]

QUOTE (RedlineBrett @ Mar 10 2009, 07:51 PM) with CMHC insured 5% down mortgages and interest rates being so low rent to owns are a tough sell.

Also - setting the future value is very difficult in a declining market... if the tenant/buyer doesn`t have confidence that the price of real estate is going to go up significantly the margins just aren`t there to cut you in for a good profit.

Also, they CAN`T buy for more than it is worth if they don`t have the cash. The property has to appraise properly for them to get a mortgage.

I would think twice about starting up an elaborate RTO program in this market. I am thanking my lucky stars we got GOOD sized deposits (10k+) from our current tenant buyers. They aren`t going to be able to close at the end of their term though and I`ll more than likely have to cut them a serious break or see if I have it in me to kick them out and keep their deposit...

We have one rent to own in Edmonton (pre-REIN) and I wouldn`t do it again.

I agree with Brett - I think they only work well in a market that continues to go up, and as we all know - that can be tough to predict.



David.

 

[brad]

I respectfully dis-agree with you guys.

I think lease to owns in todays economy are a great way to generate positive cash flow, while at the same time, hopefully having tenant free issues for 1-2-3 years. You have to be realistic in your property appreciation (4%/year?). But the right home, on the right street, in the right neighborhood shouldn`t be a problem. The issue will be pricing the house appropriately so the tenants can get financed at the end of it.

Of course it isn`t a perfect science, but there are a lot of people out there who want to be home owners that can`t qualify for financing in todays market

Brad

 

[jarrettvaughan]

QUOTE (brad @ Mar 11 2009, 06:27 AM) I respectfully dis-agree with you guys.

I think lease to owns in todays economy are a great way to generate positive cash flow, while at the same time, hopefully having tenant free issues for 1-2-3 years. You have to be realistic in your property appreciation (4%/year?). But the right home, on the right street, in the right neighborhood shouldn`t be a problem. The issue will be pricing the house appropriately so the tenants can get financed at the end of it.

Of course it isn`t a perfect science, but there are a lot of people out there who want to be home owners that can`t qualify for financing in todays market

Brad

I have a hard time understanding why a tenant would want to get into a RTO at this time.

The way I see it is that a RTO is essentially a forced savings plan, with a guaranteed purchase price. A couple years ago we all new the market was going to continue to move up, so the tenant had the great opportunity to lock into a good price, and potentially save a little money on a lower purchase price. Today, who knows what will happen. Everyday, every analyst changes their opinion of when the recovery will happen, so lets be honest, we really have no idea. So why lock into a 4% price increase over 3 years when it might be the same price in 3 years.

I think this is the wrong time to push RTOs as it is a really tough sell. I would wait a year or two, when the market moves again, RTO business will be strong. The tenant could put their DP in a savings account, deposit a few hundred dollars every month, wait it out and potentially have a much better buying oppertunity.

The RTO is great for us investors, but not so great for the tenant in this market, but hey, if you can get them signed up, all the better for you.

 

[brad]

QUOTE (jarrettvaughan @ Mar 11 2009, 10:52 AM) I have a hard time understanding why a tenant would want to get into a RTO at this time.

The way I see it is that a RTO is essentially a forced savings plan, with a guaranteed purchase price. A couple years ago we all new the market was going to continue to move up, so the tenant had the great opportunity to lock into a good price, and potentially save a little money on a lower purchase price. Today, who knows what will happen. Everyday, every analyst changes their opinion of when the recovery will happen, so lets be honest, we really have no idea. So why lock into a 4% price increase over 3 years when it might be the same price in 3 years.

I think this is the wrong time to push RTOs as it is a really tough sell. I would wait a year or two, when the market moves again, RTO business will be strong. The tenant could put their DP in a savings account, deposit a few hundred dollars every month, wait it out and potentially have a much better buying oppertunity.

The RTO is great for us investors, but not so great for the tenant in this market, but hey, if you can get them signed up, all the better for you.



How did you "know" that the market was going to continue moving up a few years ago?? How correct were you? How would you feel if you signed into a rent to own in 2007? I have talked to some Alberta investors who were appreciating the buy out by 15%/year?!?!?!?!?!?!. So, a 3 year rto, with a $350K purchase price (2007) increasing buy 15%/year, for 3 years, equals a buy out of $532,306.25 in 2010. A few years ago wasn`t the right time for many to be entering these deals. It was a time that was rampant with speculators, both investors and tenants.

To each his own, this is why I love real estate.

Just my 2 cents.

Brad Hamilton

 

[RedlineBrett]

QUOTE (brad @ Mar 11 2009, 09:11 AM) How did you "know" that the market was going to continue moving up a few years ago?? How correct were you? How would you feel if you signed into a rent to own in 2007?

Make no mistake, if you have a tenant buyer with a good enough deposit (minimum 2.5% of market value at signing IMO) and they are willing to pay you a rent you are comfortable with AND are willing to agree to a future sales price that works for you you should definitely do the deal.

I just think that finding tenant/buyers that meet ALL of these criteria is going to be much, much more difficult that it was in the past and hence, reason enough to second guess starting a business that counts on finding these kind of people to survive.

 

[markl]

The answer to the good tenant question is yes and no. Are they hard to come by yes. Are there plenty of people who cannot now qualify for mortgages with the heightened restrictions? We have actually seen an increase in better quality applications over the last several months therefore we are doing shorter terms. Rent to Own done properly is a Win/win for everybody. The tenant has ownership and treats their house as such. While the investor makes a good return. Are they or you guaranteed that they will purchase it? No It is a chance taken from both sides. As for appreciation you can put whatever you want in at the end of the day the tenant will have to get a mortgage. In this case you have to manage expectations and you might have to hold financing. In essence you have to be flexible on the sale.

As for JVing this strategy it works as you can sell yourself as the person who will get more rent for the property and a fixed sale price. But on that note you have to manage that expectation and let them know the profit may be tied up at the end holding a 2nd.

As with anything in times of turmoil managing expectations on all fronts is the easiest way to make deals work and to make it a true Win/Win

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Regards,

 

[jarrettvaughan]

QUOTE (RedlineBrett @ Mar 11 2009, 08:19 AM) Make no mistake, if you have a tenant buyer with a good enough deposit (minimum 2.5% of market value at signing IMO) and they are willing to pay you a rent you are comfortable with AND are willing to agree to a future sales price that works for you you should definitely do the deal.

I just think that finding tenant/buyers that meet ALL of these criteria is going to be much, much more difficult that it was in the past and hence, reason enough to second guess starting a business that counts on finding these kind of people to survive.

I agree, it may be very tough to start a new business for RTO this year. Maybe be best to focus on another avenue until the environment lends it self to more beneficial terms.

 

[dleischner]

QUOTE (jarrettvaughan @ Mar 11 2009, 02:19 PM) I agree, it may be very tough to start a new business for RTO this year. Maybe be best to focus on another avenue until the environment lends it self to more beneficial terms.


Thanks for all the many posts, it`s definitely left me with some good pros and cons. I`m definitely on the fence with this......

 

[Cargren]

QUOTE (jarrettvaughan @ Mar 11 2009, 07:52 AM) I have a hard time understanding why a tenant would want to get into a RTO at this time.

Bonjour Jarrett! Comment ca va?

I believe RTO targets a specific niche and is not the solution for everyone. I`m working on my 9th now, and get a lot of "tire kickers" looking for a mansion, with no money down and $1000 rent. Doesn`t work for them.

But it is an excellent option for the small business owner who can`t qualify due to low stated income, or someone who has gone through a bankruptcy and has not had the foresight to work on rebuilding their credit.

We are trying to help someone right now who got in over their heads with private financing at 14% combined with a VTB at 13%. They miss a payment (over $4100 monthly mortgage payments) and VTB wants to foreclose. We are an excellent solution for them. We buy out the house, they have equity to give us a significant deposit, have dramatically reduced monthly payment, and they buy back in couple of years with 10% downpayment with bank financing at good interest rates. The alternative is a foreclosure with all the negative results incurred. Win/Win for both of us.