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Rent-to-own structure

llee

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Jun 22, 2008
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Hi,I got an inquiry about RTO from an interested tenant-buyer in Ottawa.
Background about the applicant


The applicant (she) works in the Fed Government since 1989. Her husband had major surgery last year and was off work with barely any income. She was alone to pay 2 mortgages, heat, hydro, water, insurances, food and all unsecured bills. When they sold the house, it only paid the 2 mortgages and the agent and legal fees. It was not enough for the unsecured that is why her credit is not very good at the moment. Her husband has returned to work full time to the same company that he has been with for the past 5 years driving school children. Her husband had co signed a car loan for her son and he had the truck repossed and he is making arrangements for the balance but this reflects on my husbands credit.

Her request


She wanted to buy a 3-bedroom condo (~$180,000) for a 3-year term in East Ottawa. She`s ready to move in March 2010. She can afford approx $1,700/mo.

Questions I have.....


1. Is she a good candidate? What additional due diligence should I make?
2. I will request an application fee. Is $500 normal?
3. She will shop the house on her own and let me know what she`s interested. I will come and see the house with her only if the number makes sense, so I am not wasting my time. Is this the right RTO model?
4. If the house doesn`t make sense and I disapprove (after several times), do I reject her and return $500 fee? (ie we`re not a good match)
5. She said she can put down $2500 down payment (on top of $500 application fee). Is this sufficient?
6. My proposed rent for a $180,000 condo is $1300 per month. I suggest a monthly credit of $500. Her total payment will be $1,800/mo
7. After 36 months, she will have a credit on file of $500*36 ($18,000) + 3,000 deposit = $21,000 to be applied to her purchase.
8. I plan to use 6-6-6 appreciation model. $180,000 will become 214,382 in 3 years. Her credit will be 10% of purchase price.

Any comments are welcome!

L Lee
 

JoeRagona

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Jan 10, 2008
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Hi Lucas,

Each RTO structure is handled in a unique way from investor to investor. The one number that you have indicated is the income for the client. This in relation to their outstanding debt would be where you want to start figuring out if they can handle the $1700 payment no matter what she says.

You should ensure that their TDS is below 41%.

I also make sure that the property people choose will carry as a `normal rental` under normal rates. This is in case the tenant defaults on the option portion of the payment but still wants to live there under rental only.

An application fee of $500 is fair and will weed out the tire kickers.
 

markl

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Oct 1, 2007
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1,102
Hi Lucas,

I would have her and her husband fill out a mortgage application and have your mortgage broker complete a credit check on them and let you know how long they may need before they can purchase the property. 3 years might be more than they need.

For purchase price the mortgage broker can help you on this as well. But a good and safe rule of thumb is 3x household income. This will ensure they will be able to afford it at the end of the day.

The numbers look okay we like to get a minimum of 2% down payment but it is whatever your comfortable with and also depends on the house if they leave it is a property that you can rent-to-own again or just rent out or even sell quickly if need be.

As for the fee we credit this towards their down payment as well but we get it up front after having them sign an intent to lease that walks through the numbers on a prospective purchase so they know what they are getting into.

Sounds like you have the workings of a great rent-to-own deal if you need a realtor in Ottawa that has done a couple of rent-to-owns for us let me know and I can give you their name.

Regards,
 

llee

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Jun 22, 2008
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191
Thanks for the great feedback Joey and Mark!
 
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