Creative Ideas needed for an RTO Deal

clumsyn1nja

Phil Wong
REIN Member
Nov 3, 2014
47
2
8
Edmonton
#1
Hello All,

I recently had a client contact me to help him purchase a property. He is a self-employed carpenter and cannot be approved for a mortgage currently as his books have show that he makes less than he actually makes so it will take him a couple years to improve his verifiable income. He estimates his income to be $90,000 - $110,000 a year. He also mentions that he has $75,000 available to put down for a property. He wants an acreage for around $300,000 so his down payment should more than cover the 10% option deposit that we would want for security on such a property.

However, and here's the dilemma, he doesn't want to do an RTO. He was apparently burned by an RTO vendor in the past and doesn't want to go through that again. He suggested doing a VTB mortgage on the property but I'm not too familiar with VTB's so I'm not sure something like that would work for a situation like this. His main concern is that he wants some form of security to denote his interest in the property, namely in the form of his name on the title.

I've been racking my brain but I'm afraid I might not know enough to realize all my options in this situation. Any help would be greatly appreciated!

Thanks!

Phil
 

ThomasBeyer

Senior Forum Member
REIN Member
#2
He could do an AfS (agreement for sale) if he find a seller. Essentially it works like this:

A) He needs a seller with a mortgage not due for another 2-3 years.

B) He puts in an offer, say with $50,000 down and rather than assuming the $250,000 mortgage and changing title in his name, he writes AfS on purchase contract where it states seller financing, as per Appendix A.

Appendix A then specifies the AfS in detail, such as $250,000 on a $300,000 purchase, at 3% interest, $1200 payable monthly. Out of this $1200/month the seller pays his/her mortgage.

C) Then, in 3 years when his credit is better and he can qualify, he gets the actual title and pays the seller his remaining $250,000 minus the money he already paid over the last 3 years (over and above the 3% on $250,000 paid monthly, which is about 3 x (12 * $1200 - $7500) = $20,700) i.e. he still owes him $229,300 in three years.

The AfS gets registered on title, like a second mortgage.

More on this here http://myreinspace.com/threads/agreement-for-sale-vs-vendor-take-back-mortgage-vtb.33857/
 
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clumsyn1nja

Phil Wong
REIN Member
Nov 3, 2014
47
2
8
Edmonton
#3
Hello Thomas,

Thank you for the reply. That's actually a very good idea. Based on what you've told me, this is my plan so please let me know what you think.

1) Say we enter into an agreement where I would buy the $300,000 property for 20% down so I put down $60,000. My client then does an AFS with me and pays me $60,000 as his down payment for the home so now I'm in this property for $0. The AFS will specify that I will carry $240,000 of the $300,000 purchase, at 3% interest, at $1200 monthly from which I will use to pay my mortgage.

2) At the end of the three years, he qualifies for a mortgage and pays me the $240,000 minus the principal paydown ($15, 539.26 in this case assuming a 3% mortgage rate) for a final amount owing of $224, 460.74.

My profit from this is strictly the interest at 3*$7500 = $22,500 which isn't as much as I would get with an RTO as I don't get the equity but this seems to have better terms for the buyer which may appeal to him and balanced by the fact that I put no money into the deal.

Thoughts?

Thanks,

Phil
 

clumsyn1nja

Phil Wong
REIN Member
Nov 3, 2014
47
2
8
Edmonton
#4
A concern that I have however, is what my course of action would be if my buyer, who is now living in the home, can no longer afford the monthly payments?

Phil
 

ThomasBeyer

Senior Forum Member
REIN Member
#5
..I would buy the $300,000 property for 20% down so I put down $60,000. My client then does an AFS with me and pays me $60,000 as his down payment for the home so now I'm in this property for $0.
Why would you buy the property, and then sell to him ? Why would he not buy it directly from seller ?

If you put your money and credit at risk you need to get a return on that. As such, if you resell I'd resell it higher than $300,000, say $325,000.
 

clumsyn1nja

Phil Wong
REIN Member
Nov 3, 2014
47
2
8
Edmonton
#6
Hello Thomas,

I am making an assumption that in the event the seller is unwilling and the buyer himself doesn't know how to implement an AFS. I was thinking of charging the buyer 3.5% interest on $300,000 paid monthly on over 3 years which would net me about $31,500 in interest payments on top of any cashflow from the monthly rent payments. That would bring his purchase price with the interest payments to $331,500.

Ideally, I'd like to do an RTO with this guy as he has the cash and income but seeing as he's very against the whole idea of an RTO, I want to present a deal that would appear attractive to him that's different from an RTO but would still provide myself with a decent profit.

Based on the interest rate I want to charge him, would you still mark up the price?

Thanks,

Phil
 

Sherilynn

Senior Forum Member
REIN Member
Oct 22, 2007
2,745
614
113
Edmonton
www.qdhomequest.com
#8
Agreed. Your gross income must cover your time, risk, opportunity costs, and administrative expenses, rather than simply covering your interest expense.

To answer your question about the buyer defaulting: you would have to foreclose. In an AFS, the buyer is indeed a "buyer with equity" rather than a tenant with an option to purchase.
 

E

Inspired Forum Member
REIN Member
Aug 2, 2015
95
12
18
#9
We recently purchased 11 doors near Calgary and we almost did an agreement for sale but before closing renegotiated a deal to do a VTB at 6 percent interest only. We found it worth it for us because by gaining the title of the property through the VTB it enables us to refinance the property at more than the purchase price so that we can pull out original dollars invested.
 

Dan 7612

Inspired Forum Member
REIN Member
Dec 21, 2015
48
9
8
Ontario
#10
Phil,

Contact me. I have a proven system for RTO and a full team for the process. - If possible, can we do this together?. I can provide him references and what ever else he needs.

Question is - what part of RTO is he uncomfortable with? What can we change in the process that would make him comfortable?