How bank say about RTO down payment when renter exercise the option

[DavidLi]

Hi there,

when we do the RTO, the tenant needs to pay us some initial deposit as part of the final down payment and we put it into our seperate bank account specifical for RTO. As the program proceeds, monthly credit will go into the same account towards renter`s down payment. At the end of the term, when the renter goes to the conventional lender to apply for the mortgage for the house, we need to transfer down payment to the renter`s account so that the renter will have enough money to pay D/P and qualifies for the mortgage to get the deal done. How can we explain this amount of money to make the lender accept the money as down payment? Usually the bank will ask where the D/P comes from. If we use the mortgage broker, can the mortgage broker work around this for us and we don`t need to worry about it? How?




Any ideas or comments are greatly appreciated.





David




www.dwlcontracting.ca

"Where quality begins"

 

[Thomas Beyer]

QUOTE (DavidLi @ Apr 22 2010, 08:45 PM) ... How can we explain this amount of money to make the lender accept the money as down payment? ..
you will show a letter that states how much credit has accumulated, i.e. how much money will be forwarded by you to the tenant-buyer / his lawyer !

 

[DavidLi]

QUOTE (ThomasBeyer @ Apr 22 2010, 11:10 PM) you will show a letter that states how much credit has accumulated, i.e. how much money will be forwarded by you to the tenant-buyer / his lawyer !Hi Thomas, thanks. I read through Mark`s book "Investing in Rent-to-won property" twice, but still can not figure out the following three questions. Pro comes in please!1) based on page 122, the monthly option credit is 20%. I am wondering if we can use other numbers, say 15% or 10%. If the renter asks 30%, how can we do?
2)same page, lease rate. when we calculate the lease payment, Mark uses lease rate in the range of 0.8%-0.95%. Why pick this number? and what factors will effect us to choose the big number or small number?

3) Mark recommends us to sign two contract with the renter/buyer. one is lease agreement, which will be shown to the bank to prove there is a tenant living there and offering me a positive cash flow, the other is occupancy agreement, which is the contract between investor and tenants. It doesn`t matter how to use these two agreements, they are a binding documents between renter and investor. Both agreements have a common item: how much the renter will pay per month, which is called rent in lease agreement and called occupancy payment in occupancy agreement.

Let`s take the number as example for simplicity. House purchase price: $210K with 20% down, 4% rate 35 yrs amortization. property tax $120 per month, insurance cost $35 per month. Let`s wipe off all other costs. Based on the book, the occupancy payment is lease payment. Let`s choose 0.85% as lease rate, then the occupancy payment will be $1785, but based on the theory of the buy-and-hold, the monthly PIT cost will be $895, take the other factors in, the reasonable market rent will be roughly $1200 - 1300.

so my question is are we using $1200 - 1300 as rent when we sign lease agreement and using $1785 as occupancy payment when we sign occupancy agreement? If we use different nubmers, then which one will be legally accepted? The renter/buyer will not give us a hard time to justify if we put different numbers in the different agreement? just because one is for bank, the other for us and renter. Don`t forget both docs are legally binding us. All the clauses in them apply to us.

Any comments are welcome!!!

David

 

[omanalese]

Hi David,Regarding the monthly option credit of 20%: The main goal is that the tenant has enough down payment at the end based on your mortgage broker`s recommendation.  We use at least 7% or 12% of the projected purchase price.  So if the tenant can provide a higher down payment today then we are flexible, meaning the tenant does not have to save up as much to achieve the down payment goal at the end.  If the tenant has 10% of tomorrow`s purchase price then they will not need as much monthly savings than someone going in with a lower down payment like 2.5%, which is our minimum.  The higher down payment, the lower monthly payment.  There is always a give and take. This should answer the second question of lease rate as well.  For $200,000, typical rent to own payment is $1700 with a $340 option credit.  We use 0.85% if they are providing the bare minimum on the rent to own like 2.5% down.  If they have a higher down payment upfront than we can decrease the monthly rent to own payment, reducing it from the credits that they don`t need.  Again, the main goal is that they have enough down payment at the end.  We have some deals where the tenant is paying 0.75% lease rate but that is because we know ahead of time that they will have the appropriate down payment to qualify for financing at the end since they provided a much higher down payment up front.For your last question about Occupancy Payment, that is always the total monthly rent.  So in your case the $1785 a month.  Market rent has nothing to do with RTO.  These payments are based on achieving the tenant`s goal of home ownership by building their down payment through option credits and also what fits their budget and simultaneously allows them to repair their credit history.  

There is only two agreements Occupancy Agreement and Option to Purchase.  Not an Occupancy and a Lease agreement.  The Occupancy will have your total monthly rent to own payment of $1785.  The Option to Purchase will detail their initial option deposit, monthly option credits and projected purchase price.

If you have any more questions, feel free to contact me.

Best,

Oliver

QUOTE (DavidLi @ Apr 23 2010, 10:54 PM) Hi Thomas, thanks.

I read through Mark`s book "Investing in Rent-to-won property" twice, but still can not figure out the following three questions. Pro comes in please!

1) based on page 122, the monthly option credit is 20%. I am wondering if we can use other numbers, say 15% or 10%. If the renter asks 30%, how can we do?

2)same page, lease rate. when we calculate the lease payment, Mark uses lease rate in the range of 0.8%-0.95%. Why pick this number? and what factors will effect us to choose the big number or small number?

3) Mark recommends us to sign two contract with the renter/buyer. one is lease agreement, which will be shown to the bank to prove there is a tenant living there and offering me a positive cash flow, the other is occupancy agreement, which is the contract between investor and tenants. It doesn`t matter how to use these two agreements, they are a binding documents between renter and investor. Both agreements have a common item: how much the renter will pay per month, which is called rent in lease agreement and called occupancy payment in occupancy agreement.

Let`s take the number as example for simplicity. House purchase price: $210K with 20% down, 4% rate 35 yrs amortization. property tax $120 per month, insurance cost $35 per month. Let`s wipe off all other costs. Based on the book, the occupancy payment is lease payment. Let`s choose 0.85% as lease rate, then the occupancy payment will be $1785, but based on the theory of the buy-and-hold, the monthly PIT cost will be $895, take the other factors in, the reasonable market rent will be roughly $1200 - 1300.

so my question is are we using $1200 - 1300 as rent when we sign lease agreement and using $1785 as occupancy payment when we sign occupancy agreement? If we use different nubmers, then which one will be legally accepted? The renter/buyer will not give us a hard time to justify if we put different numbers in the different agreement? just because one is for bank, the other for us and renter. Don`t forget both docs are legally binding us. All the clauses in them apply to us.

Any comments are welcome!!!

David

 

[MarkTorgerson]

QUOTE (omanalese @ Apr 27 2010, 08:14 PM) Hi David,

Regarding the monthly option credit of 20%: The main goal is that the tenant has enough down payment at the end based on your mortgage broker`s recommendation. We use at least 7% or 12% of the projected purchase price. So if the tenant can provide a higher down payment today then we are flexible, meaning the tenant does not have to save up as much to achieve the down payment goal at the end. If the tenant has 10% of tomorrow`s purchase price then they will not need as much monthly savings than someone going in with a lower down payment like 2.5%, which is our minimum. The higher down payment, the lower monthly payment. There is always a give and take.

This should answer the second question of lease rate as well. For $200,000, typical rent to own payment is $1700 with a $340 option credit. We use 0.85% if they are providing the bare minimum on the rent to own like 2.5% down. If they have a higher down payment upfront than we can decrease the monthly rent to own payment, reducing it from the credits that they don`t need. Again, the main goal is that they have enough down payment at the end. We have some deals where the tenant is paying 0.75% lease rate but that is because we know ahead of time that they will have the appropriate down payment to qualify for financing at the end since they provided a much higher down payment up front.

For your last question about Occupancy Payment, that is always the total monthly rent. So in your case the $1785 a month. Market rent has nothing to do with RTO. These payments are based on achieving the tenant`s goal of home ownership by building their down payment through option credits and also what fits their budget and simultaneously allows them to repair their credit history.

There is only two agreements Occupancy Agreement and Option to Purchase. Not an Occupancy and a Lease agreement. The Occupancy will have your total monthly rent to own payment of $1785. The Option to Purchase will detail their initial option deposit, monthly option credits and projected purchase price.

If you have any more questions, feel free to contact me.

Best,

Oliver


Hey Oliver

Great and informative post!
You mentioned in your above post that market rent has nothing to do with RTO. So "theoretically" could you have a tenant/buyer come in with zero cash down, charge $3,000 per month for a lease, have 100% of the lease payment ($3,000) credited towards purchase and still get him a CMHC approved mortgage?

Thanks

 

[markl]

The 2 documents required are an occupancy agreement or lease depending on your terminology they are one in the same thing depending on your lawyer and what province you are in and an option contract.

The full rent amount + the deposit are on the lease/occupancy agreement. The option agreement only comes into play when they exercise it. Oliver has already stated what is in the option agreement.

On the numbers these are just guidelines not hard and fast rules. It depends on what return your looking for in return for the risk you are taking.

For the deposit we write a letter stating where it came from. The rents do need to be above market and if we do get a bigger down payment up front we can reduce the monthly payments but typically this comes straight off their rental credits so as not to bring them below market rents.

Regards,