Rent To Own question

Dejavu

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#1
Hi,

I just read in another RTO thread that CMHC requires option money paid by the tenants to be kept in trust till the sale closes in the end of the lease term. I am planning to do a couple of RTO deals in the near furture and was wondering if experts and those with experience could share their insight on this.

I was under the impression that the downpayment already paid by tenants through option deposit+monthly credits could be shown as such in the agreement of purchase and sale. So in essence it would be a paper transaction for the most part. I am however, second guessing it now...

I was wondering if people with experience could share their thoughts on how to best structure Rent+Option payments so that the banks and CMHC are satisfied that tenant`s have the required downpayment when time comes to close the sale and for the tenants to secure their own financing?

Thanks in advance,

Vitaly
 

GaryMcGowan

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#2
QUOTE (Dejavu @ Feb 28 2010, 03:37 PM) I just read in another RTO thread that CMHC requires option money paid by the tenants to be kept in trust till the sale closes in the end of the lease term. I am planning to do a couple of RTO deals in the near furture and was wondering if experts and those with experience could share their insight on this.

I was under the impression that the downpayment already paid by tenants through option deposit+monthly credits could be shown as such in the agreement of purchase and sale. So in essence it would be a paper transaction for the most part. I am however, second guessing it now...
,

Vitaly

I have been looking for this information and can not find it and have the question out to a couple of brokers. I do know that sometimes the lenders will require that you as the RTO Specialist (owner) can show that you have the funds on hand.

If anyone has the CMHC source please post it.
 

Dejavu

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#4
I have this question out to a broker as well and if I hear back, will post here. In the meantime, perhaps if any mortgage brokers on the board helped their RTO clients get mortgages recently and could share their experience, it`ll be much appreciated.

Vitaly
 

Cargren

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#5
We are closing on a sale to a RTO tenant and Scotia is requesting a letter showing that the monthly credit is above and beyond market rent. There has been no request for proof of their deposit and monthly credit in a trust account or similar.

We are in process of determining who does this letter and what proof of market rent is required.

Hope this helps,
Rob
 

BrianPersaud

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#6
QUOTE (Cargren @ Mar 1 2010, 03:13 PM) We are closing on a sale to a RTO tenant and Scotia is requesting a letter showing that the monthly credit is above and beyond market rent. There has been no request for proof of their deposit and monthly credit in a trust account or similar.

We are in process of determining who does this letter and what proof of market rent is required.

Hope this helps,
Rob

spoke to someone from CMHC some time ago, says best bet is to keep credit in a trust account. I have had people who specialize in them say they`ve closed without it and used the extra cashflow. It`s a good question.
 

markl

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#7
I think the problem is it comes down to lender by lender standards. There is no hard and fast rule from CMHC that I have heard of.

We have had to show that the rents were truly above market with a letter. We have had to deposit said money into a lawyers trust account to close as well.

So if you are JVing them know that this might happen and ensure you have enough cash to close on your end.

Regards,
 

MarkTorgerson

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#8
QUOTE (BrianPersaud @ Mar 1 2010, 02:30 PM) spoke to someone from CMHC some time ago, says best bet is to keep credit in a trust account. I have had people who specialize in them say they`ve closed without it and used the extra cashflow. It`s a good question.


I have been getting RTO tenant/buyers to make up two cheques per month. One for the payment and one for the monthly credit. For example if they are paying me $1000 per month and I am crediting them back $300 per month. I am having them write a cheque for $700 and another cheque for $300. This helps clarify the paper trail when the option date comes due. I am still unclear of the CMHC rules and if it is more of a difference in requirements from bank to bank. Seems like a large area of grey.....
 

dannial

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#9
QUOTE (Dejavu @ Mar 1 2010, 12:41 PM) I have this question out to a broker as well and if I hear back, will post here. In the meantime, perhaps if any mortgage brokers on the board helped their RTO clients get mortgages recently and could share their experience, it`ll be much appreciated.

Vitaly

I recently had lunch with the Regional Manager for CMHC in Southern Ontario. She told me that if you have an RTO, the downpayment and the monthly rental portion that you credit back to the client has to be held in trust or with a third party such as a lawyer. This applies if the client is being financially set up for their own CMHC mortgage.
What are others doing??
 

BrianPersaud

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#10
QUOTE (dannial @ Mar 1 2010, 07:39 PM) I recently had lunch with the Regional Manager for CMHC in Southern Ontario. She told me that if you have an RTO, the downpayment and the monthly rental portion that you credit back to the client has to be held in trust or with a third party such as a lawyer. This applies if the client is being financially set up for their own CMHC mortgage.
What are others doing??

I know some that are keeping it as cash, otherwise their properties would not cashflow with the down payments they put on the property.
 

retiredby50

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#11
QUOTE (BrianPersaud @ Mar 1 2010, 05:57 PM) I know some that are keeping it as cash, otherwise their properties would not cashflow with the down payments they put on the property.

I agree with this, and certainly want to keep it as cash flow. If I have to put it in trust there really isn`t an incentive for me to do an RTO. My cash flow goes back to what it was when there was just rent coming in.

Another problem with this rule, if it in fact does exist Canada wide, is that it creates a situation where a landlord only benefits by RTO if the tenant defaults and loses their deposit money. i could see some landlords setting their tenant buyers up to fail so they can take the deposit money. Yikes.

It also makes me wonder if we can legally have access to the funds in the event of a default if it`s in trust? Any thoughts on that?

Either way it`s not a good thing for landlords, and it`s not a good thing for our tenant buyers either, who might have a hard time getting financing. I for one will not be offering it if I can`t get the cash flow.

When I had my lawyer review my lease option docs, she didn`t say anything about this, so obviously she doesn`t know about it. I wonder how many people out there really do?

Keith
 

GarthChapman

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#12
QUOTE (BrianPersaud @ Mar 1 2010, 05:57 PM) I know some that are keeping it as cash, otherwise their properties would not cashflow with the down payments they put on the property.

Rental properties must cashflow to make sense unless there are other very significant upsides (like huge equity going in). If it doesn`t cashflow without counting the deposit portion received every month it is not a good investment. All you are doing then is eating up your equity as you go along. And you have tied up capital and time to manage it.

WHY BOTHER? Put the money in a CD instead and take no risks.
 

Dan_Eisenhauer

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#13
This is a black and white issue, with no grey in it at all. CMHC has required the Purchase Credits to be greater than market rent for as long as I have been in the industry... close to 40 years. (Where did that time go?)

There is no firm requirement for the money to be left in a trust account. However, you do, as Mark pointed out, have to be able to prove that the Purchase Credit portion is greater than market rent, and that $XXX has been collected from the TB prior to closing the sale. A letter generally meets that requirement.

And for those who want to set up a Trust Account, it is not a "Trust Account" that you need, rather a separate account into which you deposit the Purchase Credits. A Trust Account is a cumbersome, expensive account to have, and requires annual auditing by some governmental agency, which varies from province to province.
 

dpeacock

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#14
I spoke with Barry Mcguire on this topic over the weekend. My understanding was that you don`t have to hold this money in "Trust" indefinitely, which would of course defeat the whole purpose of Lease/own. He said you just have to be able to show to the future lender that the Option payment and payment above the rent could be validated by your paper trail, so as to be used by the T/B for their down payment credit.
So, recieving 2 cheques from your tenant buyer, in addittion to the Lease option payment, and having a banking record of that transaction should satisfy. Unless I`m missing something.
 

MarkTorgerson

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#15
QUOTE (Dan_Eisenhauer @ Mar 6 2010, 08:43 AM) This is a black and white issue, with no grey in it at all. CMHC has required the Purchase Credits to be greater than market rent for as long as I have been in the industry... close to 40 years. (Where did that time go?)

There is no firm requirement for the money to be left in a trust account. However, you do, as Mark pointed out, have to be able to prove that the Purchase Credit portion is greater than market rent, and that $XXX has been collected from the TB prior to closing the sale. A letter generally meets that requirement.

And for those who want to set up a Trust Account, it is not a "Trust Account" that you need, rather a separate account into which you deposit the Purchase Credits. A Trust Account is a cumbersome, expensive account to have, and requires annual auditing by some governmental agency, which varies from province to province.

Hi Dan

You mention that a letter generally meets the requirement of verification of the purchase option credit being greater than market rent. Who writes this letter and does anyone need to authorize it?? For example a licensed realtor or property manager?? Do you have an example of how the wording may read?

Thanks
Mark
 

markl

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#16
Hi Mark,

The homeowners/investors are writing the letter we just did the same for Laurentian Bank. If they do want to see the money in trust it has to be seasoned for 3 months and we use our lawyers trust account.

Regards,
 

EdRenkema

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#17
Am I missing something here?
The whole point of RTO is increased cash flow and what good is that if you need to keep the amount over and above market rent in a `Trust Account` ??
I treat each property as a separate business with a separate bank account. When excess cash flow builds up over contingency fund and last months rent deposit I use it where its needed most.
 

dpeacock

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#18
My understanding is that if you collect separate cheques for initial lease option deposit and a separate cheque for the payment above the rent, your bank statement would show you recieved and deposited these amounts to your bank account. My assumption is that a copy of the cancelled checks and/or a copy of your bank transaction page, showing these separate deposits would provide proof that the T/B has made these deposits towards the down payment of said property. I haven`t done it, but have been trying to understand the process myself.

QUOTE (MarkTorgerson @ Mar 15 2010, 08:58 PM) Hi Dan

You mention that a letter generally meets the requirement of verification of the purchase option credit being greater than market rent. Who writes this letter and does anyone need to authorize it?? For example a licensed realtor or property manager?? Do you have an example of how the wording may read?

Thanks
Mark
 

MarkTorgerson

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#19
QUOTE (markl @ Mar 16 2010, 02:24 AM) Hi Mark,

The homeowners/investors are writing the letter we just did the same for Laurentian Bank. If they do want to see the money in trust it has to be seasoned for 3 months and we use our lawyers trust account.

Regards,


Hi Mark

Can you give an example of how this letter would read?

Thanks
 

Cargren

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#20
QUOTE (MarkTorgerson @ Mar 16 2010, 09:04 AM) Hi Mark

Can you give an example of how this letter would read?

Thanks

Hi Mark,

I`d appreciate a copy as well as I have to do one up for one of our T/B who`s buying us out in the next month.

Rob