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Rent to Own: Buying from Selling to same occupant

Aneta

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Would this scenario be legal?

* Current owner occupant has mortgage trouble and cannot re-qualify for a mortgage today. Current owner has lived in property many years and has built up equity (let`s say 25% of current value). Current owner would like to keep house and stay.
* Investor sets up rent to own with this occupant as the tenant buyer. Deposit from tenant buyer would be significant (let`s say the equity they have built up).
* Agreed purchase price today would be under today`s fair market value (let`s say 10% under FMV)
* Agreed purchase price at end of rent to own term would be either at or over today`s fair market value (let`s say up to 10% over today`s FMV)

Because the investor is buying from and then selling back to the same party, is that a concern? Is it a problem or illegal activity if the two different price points create a spread for investor, at the expense of the current owner (equity loss)? The reason for the under market value purchase would to be neutralize any additional downswing in value on the backend of the RTO deal. If current owner is willing to forgo some of that equity in order to fix their credit problem, is it legitimate?


There are some many rules and laws these days, just want to make sure.

Thanks for the help!
 

Shaune

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Aneta

I have done a deal exactly as you lay it out. I bought at a discount to FMV and entered into a lease-to-own agreement with the previous Owner for a purchase price inflated for appreciation over three years. I had no issues.
 

Shaune

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Aneta

I forgot to mention that I received the lease deposit from the proceeds of the sale. The paperwork was in place for the monies to come directly to me instead of going through the hands of the previous Owner. Your lawyer can look after this for you when writing up the offer.

I also made signing of the lease-to-own contract by the previous Owner a condition of the sale.
 

GaryMcGowan

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We have just completed/entered into two of these deals.
We bought at FMV and will be selling at FMV. The lender required that we have an appraisal done to confirm it was not an inflated price.
Some lenders will not even touch this. It is very important to have a broker that can explain what you are doing.
Mark Loeffler helped us through these deals.
Call me if you like.
 

Thomas Beyer

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QUOTE (Aneta @ Mar 4 2010, 01:35 PM) Would this scenario be legal?
..
why would it not be legal ? A transaction between consenting adults ? No one is forced to sell .. you are not forced to buy / rent-to-own !

The problem MAY arise in the future if "tenant" does not buy or defaults on rent. Thus you need a lease (for a possible court enforced eviction) AND a purchase option contract.

Plus of course the original purchase contract.
 

Shaune

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I never do a RTO without a credit bureau, a job letter and a budget. If it is not win-win then the deal is no good for me. I also make routine check ups on their financial health both through bureau updates and the mortgage broker I set them up with. Since most of my RTO`s are with distressed credit tenants, I do longer terms, typically three years (or longer if required for them to repair their credit), and do my best to collect 10% down over the term through the deposit and the monthly option payments. Without doing that they will likely be stuck for the balance of the down payment when it comes time to finance. That is where the budget comes into play when first setting up the deal.
 

smmcguire

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QUOTE (Aneta @ Mar 4 2010, 02:35 PM) Would this scenario be legal?

* Current owner occupant has mortgage trouble and cannot re-qualify for a mortgage today. Current owner has lived in property many years and has built up equity (let`s say 25% of current value). Current owner would like to keep house and stay.
* Investor sets up rent to own with this occupant as the tenant buyer. Deposit from tenant buyer would be significant (let`s say the equity they have built up).
* Agreed purchase price today would be under today`s fair market value (let`s say 10% under FMV)
* Agreed purchase price at end of rent to own term would be either at or over today`s fair market value (let`s say up to 10% over today`s FMV)

Because the investor is buying from and then selling back to the same party, is that a concern? Is it a problem or illegal activity if the two different price points create a spread for investor, at the expense of the current owner (equity loss)? The reason for the under market value purchase would to be neutralize any additional downswing in value on the backend of the RTO deal. If current owner is willing to forgo some of that equity in order to fix their credit problem, is it legitimate?


There are some many rules and laws these days, just want to make sure.

Thanks for the help!



There is a precedence set in the courts of Canada. If your deal goes sideways, and it probably will, she can sue you. (current owner doing LTO in their former home). The courts "will rule against you and you will be ordered to return all proceeds and costs. That is the risk you take.
 

Thomas Beyer

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QUOTE (smmcguire @ Mar 5 2010, 07:41 AM) There is a precedence set in the courts of Canada. If your deal goes sideways, and it probably will, she can sue you. (current owner doing LTO in their former home). The courts "will rule against you and you will be ordered to return all proceeds and costs. That is the risk you take.
sue based on what ?

you have a link to that court case ruling ?
 

jseib

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Perhaps if you did a quick turn arrangement, taking over there payments and leasing it back to the them... I can see a fair number of judges scratching there heads over that one and just ruling against you because it sounds fishy..

If you OWN the home, it`s in your name and you have a purchase and sale agreement signed and paid for along with all the other oodles of documentation that goes along with a home purchase it`s far simpler.. Nothing for a judge to scratch ones head over..
 

markl

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The only thing they can state is you did not buy the property at fair market value you took it under duress. In this situation we always get a certified appraisal done so there is no question. Plus we do our own comps.

Regards,
 

MikeMcCrae

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I don`t think there is anything illegal about what you are doing. But I can`t think of a lender that would get involved with this the way the market is today. If any additional payments and the deposit are not completely refundable, this deal will not complete because it is against CMHC and lender guidlines. Who knows what the future will bring but in today`s world there would be a high probability that the tenant would not get financed.
 

GoRentFreeFast

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Aneta,

We do 2-3 of these ‘Buy-N-Lease back’ per months so here’s the skinny:

Perfectly legal – if you need Lease or option agreements please let me know and I will provide them for you to keep you out of trouble.

Set it up like a normal LTO deal i.e. the tenants have to go through the normal screening process and do as we do, pay for the tenants to go through credit rehab during the term of the lease thereby increasing their ability to complete to term.

Don’t buy at too much of a discount; the legal ruling mentioned in this string is (I believe) based upon the buyer securing the property at a dramatic discount with the understanding that the seller would buy it back at a near or equivalent discount...when they defaulted the court took exception to the discount clause. Yet one more reason I pay a lot of money each month to great lawyers...never cheap out on lawyers or accountants!

Use a realtor; We noticed last December (2009) that the banks we’re telling out investors they needed an MLS listing and an OREA 100 purchase and sale agreement and that they didn’t like private sales anymore. This may be localized to southern Ontario but it’s what we’re seeing at the moment.

Please feel free to connect with me if you have any questions.

Philip
 
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