Price Appreciation for Rent To Own Investments

AndyTran

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Dear Members,

Was wondering if anyone had any particular strategies when determining the amount of price appreciation to fix on Rent To Own properties?

I recall seeing a chart by CMHC listing every zone in the Canada (eg, in Toronto W1,C1,E1). and then it would indicate it`s historic sale prices from the past several years and it`s projected appreciation in the next couple of years. It would list it based on single family 2 storey, bungalows, townhouses, and condos. I have scoured the CMHC site but can`t seem to find that report.

I figured this might be a good starting point to use when determining how much appreciation should be set on an annual basis that would be quite useful for RTO investments.

Would appreciate any info.

Best regards,
Andy
 

ThomasBeyer

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#2
QUOTE (AndyTran @ Jul 11 2010, 05:36 PM) ..

I figured this might be a good starting point to use when determining how much appreciation should be set on an annual basis that would be quite useful for RTO investments.
Whatever the tenant-buyer and you are willing to accept !

4%/year is reasonable .. even 6% .. but also 2% or 8% ..
 

RedlineBrett

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#3
I think you need to be comfortable with an appraisal at closing and go with that.

Even if you get them to agree to a 10% / yr appreciation rate they won`t be able to pay you that unless that`s how the market actually performs.

If the property doesn`t appraise for the purchase price they won`t be able to get a mortgage. Many investors try to get the tenant/buyer to take a second mortgage for the difference in equity so say the appraised value is 350k and contract is for 400k, well then T/B takes has to take a 50k second mortgage to pay the contract price.

However putting this on the purchase contract makes it very likely the bank will say `what`s going on` and the T/B won`t be able to get financed. So you will have to convince your tenant/buyer to sign a document saying they owe you more than the property is worth and you will have to hide it from the primary transaction. Good luck with that!

win/win is selling for full market value when their term is up. Bit of uncertainty for both sides but if you didn`t believe in the market you wouldn`t be investing!
 

markl

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Hi Andy,


What type of return are you looking for? Are you using a tenant first model or a property first where you are upgrading the property before the tenant buyers come in?

Price appreciation is hit and miss and a lot of people have their opinions on it. We are using 5 - 6% per year at this time and we are having no argument from the tenant buyers. We were using as high as 9/6/6 per year in previous years.

We are closing on a few properties a month in which are tenant buyers are exercising their option we only have about 1 in 10 that are not coming back appraised at the purchase price. (Bank Appraisals)

It all comes down to what you can sell and what your intentions are. If you want to have your tenants succeed or fail. Let`s keep in mind that on a $200k house the difference in 1% of appreciation per year is not a lot on a 2 year term.

Regards,
 

jseib

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#5
You can charge whatever you want, however their does come a point where your no longer creating win-win scenarios and that`s when I believe your business goes from investing to profiteering.

I offer 4% yearly on 3 year terms and 5%/4% on 2 years. I feel that`s fair and any client I want to work with usually agrees. Obviously if I believed appreciation would be higher that would be adjusted but I feel appreciation will likely be 3% going forward so that`s the number that gives me the return I want while still feeling I`m helping someone.

That`s not to say there`s anything wrong with 6%... I was just trying to explain why I personally chose 4%.
 

RedlineBrett

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#6
QUOTE (jseib @ Jul 12 2010, 09:13 AM) You can charge whatever you want, however their does come a point where your no longer creating win-win scenarios and that`s when I believe your business goes from investing to profiteering.

I offer 4% yearly on 3 year terms and 5%/4% on 2 years. I feel that`s fair and any client I want to work with usually agrees. Obviously if I believed appreciation would be higher that would be adjusted but I feel appreciation will likely be 3% going forward so that`s the number that gives me the return I want while still feeling I`m helping someone.

That`s not to say there`s anything wrong with 6%... I was just trying to explain why I personally chose 4%.

So what do you do when your tenant/buyer owes you more than the property is worth and they can`t qualify for a loan that cashes you out?
 

markl

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#7
Brett the key is to ensure your tenant qualifies for the future price. We use a 6% interest rate with a 25 year amm to qualify them at the higher price.

If the question is if the appraisal does not come in typically we hold a small 2nd mortgage.

Regards,
 

RedlineBrett

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#8
QUOTE (markl @ Jul 12 2010, 11:04 AM) If the question is if the appraisal does not come in typically we hold a small 2nd mortgage.
Regards,

Do you write this into the purchase contracts and does the new first place lender know about it at closing? Is the tenant/buyer made aware of this eventuality and how it will be treated?

I have had CMHC come back on a number of deals saying that the appraised value is less than the contracted price. When this happens they usually ask for cash from the buyer to make up the difference. The last time I had this happen (where the buyer still wanted the property and would pay the higher price... but didn`t have cash) CMHC wouldn`t consider a second mortgage... so the seller had to be ok with a promissory note.
 

jseib

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#9
From my perspective it comes down to making sure your tenant AND property will qualify from the get-go. This means not being able to work with everyone or every property.

We ended up bringing our original set of realtors in as partners in the business. Thus the realtors themselves have a stake in how successful the deal is beyond the initial commission. So we direct our tenant buyers to areas or pockets that will appreciate and are priced competitively. It`s not a sure fire solution but it should help smooth over any minor bumps in the pricing.

During negotiations we try to get the best price possible and pass on the entire savings to the tenant buyer. This results in an average of $4000 in savings which should help as well. Honestly if you have a major bump like the one we experienced in late 08 early 09 then I`m not sure there is anything you can do.

If something goes wrong the only options you have are:

A) Hold a second/note/loan for the difference

or

B) Increase the term with a lower appreciation rate so the real world appreciation can catch up (this is my preferred method)

or

C) Lower your selling price just to close the deal and get it off the books


It used to be easy to get the know the appraisers a bank used and nudge them a bit to get a slightly higher appraised value, now it`s difficult as they detail the jobs off based on whose next on their contact list. So you end up with appraisers not from the area and I see some of the reverse happening where some places are under appraised. Guess you can`t win no matter what.

If CMHC turned down the mortgage and refused a second, may I ask how far apart was the appraised price and selling price?

As for letting the clients know, we mention it briefly on our website but it`s not listed in our contract so we are not obligated to do anything. But it`s in our best interests to make sure everyone is happy and the gears are sufficiently greased as we don`t want to own a bunch of vacant properties.
 

RedlineBrett

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#10
QUOTE (jseib @ Jul 12 2010, 12:28 PM) If CMHC turned down the mortgage and refused a second, may I ask how far apart was the appraised price and selling price?

As for letting the clients know, we mention it briefly on our website but it`s not listed in our contract so we are not obligated to do anything. But it`s in our best interests to make sure everyone is happy and the gears are sufficiently greased as we don`t want to own a bunch of vacant properties.

Contract price was 605k, appraisal was 590.
 

RedlineBrett

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#12
QUOTE (JoeRagona @ Jul 12 2010, 03:36 PM) Hey Brett, would you in this case not just adjust your pay out price to that of the appraisal?

This particular deal wasn`t on a rent to own but same problem through CMHC.

But would I walk from $15,000.... not happily. Would you??
 

jseib

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#13
Well you could say your walking away from $15,000

One could also say your avoiding Realtor fees, taxes on said fees and possibly eating some vacant time with the property. I suspect when you add it all up if your walking away from anything its significantly smaller then $15,000 and it could very well be that you`d save money in the end.
 

RedlineBrett

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QUOTE (jseib @ Jul 13 2010, 10:05 AM) Well you could say your walking away from $15,000

One could also say your avoiding Realtor fees, taxes on said fees and possibly eating some vacant time with the property. I suspect when you add it all up if your walking away from anything its significantly smaller then $15,000 and it could very well be that you`d save money in the end.

Well you`d still be saving all those fees at the higher price. It`s a net 15k loss any way you look at it.

The way I see it Landlord/Sellers that use appreciation rates are shortchanging themselves regardless of the eventual outcome:

1. If they set a rate too low then they`re leaving money on the table
2. If they set a rate too high they can`t cash for it anyway as the property has to appraise.

Also if the option price for the tenant buyer is over market value by any more than their option deposit they have no further incentive to close. Would you pay 20k more than a house is worth just to save the 10k you put down? Doesn`t make sense for them.

I`m not an exclusive RTO investor but I`ve done a handful of them. In my experience it`s an easier sell to the tenant/buyer to say there will be an appraisal and that sets the purchase price. Can`t be much more fair than that so it`s totally win/win. You can also set a `price floor` to ensure you get your return... so if the market hasn`t made the 6% you need then the tenancy period continues.

This is easier for the tenant to swallow than having to do some shady second mortgage deal / prom note that they have to hide from the bank... Not only are you asking your tenant/buyer to pay more than the property is worth but technically speaking you`re also asking them to commit mortgage fraud so you can turn a profit
 

Debbie

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#15
QUOTE (markl @ Jul 12 2010, 08:03 AM) Hi Andy,


What type of return are you looking for? Are you using a tenant first model or a property first where you are upgrading the property before the tenant buyers come in?

Price appreciation is hit and miss and a lot of people have their opinions on it. We are using 5 - 6% per year at this time and we are having no argument from the tenant buyers. We were using as high as 9/6/6 per year in previous years.

We are closing on a few properties a month in which are tenant buyers are exercising their option we only have about 1 in 10 that are not coming back appraised at the purchase price. (Bank Appraisals)

It all comes down to what you can sell and what your intentions are. If you want to have your tenants succeed or fail. Let`s keep in mind that on a $200k house the difference in 1% of appreciation per year is not a lot on a 2 year term.

Regards,

I am working on a tenant first rent to own right now. Wondering what appreciation rate others in the Calgary area are using now?
Does anyone know of any good resources that predicts the housing appreciation values for the future?
As for using the appraisal method, my lawyer said having the price in the option was important but I can`t explain the logic behind that.

Thanks
Debbie Niessen
 

RebeccaBryan

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#16
Awesome conversation. I learned a lot by reading this. I`m thinking of doing a rent-to-own as well as I have tenants very interested in one of my properties and JV partners that would like to get out. Now it`s just to research myreinspace to decide what to do and how to do it. Thanks. :)
 

JoeRagona

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#18
QUOTE (RedlineBrett @ Jul 13 2010, 01:25 PM) Well you`d still be saving all those fees at the higher price. It`s a net 15k loss any way you look at it.

The way I see it Landlord/Sellers that use appreciation rates are shortchanging themselves regardless of the eventual outcome:

I`m not an exclusive RTO investor but I`ve done a handful of them. In my experience it`s an easier sell to the tenant/buyer to say there will be an appraisal and that sets the purchase price.


Maybe I`m not understanding how you are viewing this but if you are taking the appraisal option it doesn`t really amount to ANY loss (unless of course the property dropped in value). The loss you speak of is IF you have set a particular buyout price that does not come to completion. Then and only then it is a loss in YOUR mind because it is on paper and one you were counting on.

Assuming you used the appraisal route and the value has increased, you would get what the property is worth - do you agree? So I don`t see how this is a "loss".

I suppose it comes down to semantics
 

RedlineBrett

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QUOTE (JoeRagona @ Aug 3 2010, 10:11 PM) Maybe I`m not understanding how you are viewing this but if you are taking the appraisal option it doesn`t really amount to ANY loss (unless of course the property dropped in value). The loss you speak of is IF you have set a particular buyout price that does not come to completion. Then and only then it is a loss in YOUR mind because it is on paper and one you were counting on.

Assuming you used the appraisal route and the value has increased, you would get what the property is worth - do you agree? So I don`t see how this is a "loss".

I suppose it comes down to semantics



The example I provided earlier wasn`t a RTO deal but rather an instance where CMHC did not appraise the property to the purchase price on the contract. This was a `full market value` buy right off MLS.

So the seller thought they were getting 605k but then the appraisal came back at 590k. Buyer could have walked if they wanted to. It`s not that much of a stretch to see how this could mimic scenarios where a landlord/seller has set the future price based on an estimated appreciation rate and loses out when the appraisal comes back less than that. Would definitely feel like a loss to the seller.

Seller also loses if they set a rate at 5% when it would actually be 7% or something higher. So, in my opinion, appreciation rate forecasting is a losing proposition for landlord/sellers in RTO deals.