Rent to Own

[vernonrenttoown]

Hi Rein members I am wondering how those of you doing Rent to Own operate in a declining market, I find the program works well in an appreciating market, but is challenging in a decling market, how do you protect the tenant buyer and the investor two years out when the value has dropped 10 or 15%
Thanks

Chris Moxham
www.VernonRentToOwn.ca

 

[Dan_Eisenhauer]

That is one of the major pitfalls of RTO. There is no easy answer.

Mark Loeffler has two ways around it, you, the investor, carry a VTB, or extend the RTO until values catch up to the sale price.

I have a friend who does quite a bit of RTO business. He had one deal that he extended eight times, each time increasing the rent, as well as the price. Now this was at a time of rising prices. But, it proves that we do not need to be tied into a fixed two or three year term.

When you buy at a discount, you do not need to be quite as concerned about the value as when you pay full retail.

 

[markl]

I kind of liken this to how do you protect a home owner if prices drop 10 - 15%? The tenant is probably in a better scenario as they only have an option and can walk away if you cannot agree to different terms with them. As for the investor they typically make a higher return if the tenant walks and you re RTO the property.

This is where you have to be creative with this exit strategy and gear what you do to your expected outcome or to your goals with the property and real estate in general.

I have also offered a tenant to purchase the home for the same value I bought it for but I would keep the monthly deposits instead of using them towards the purchase price.

Hope this makes it as clear as mud

 

[Dan_Eisenhauer]

That is an interesting suggestion, Mark. Thanks for sharing.

It proves that for every problem there is a myraid of possible solutions.

 

[Thomas Beyer]

QUOTE (vernonrenttoown @ Nov 8 2010, 11:43 AM) .. but is challenging in a decling market, how do you protect the tenant buyer and the investor two years out when the value has dropped 10 or 15%
real estate in a declining market (like Vernon ?) is always less enjoyable than in a rising market .. be it RTO or "normal" !

There are really only three options in an RTO situation:

a) tenant buyer leaves i.e. does not exercise his option, or
b) tenants buyers stays as tenant (i.e. does not exercise his option), or
c) you renegotiate and find a new price and/or a new timeline that fits both parties

 

[AndreaW]

I would suggest buying properties at least 10% under market value to buffet against the declining prices. Another suggestion would be to offer a small second mortgage to the RTO buyer - but be careful here - you may have to forgive the loan if prices continue to decline.



Andrea Warkentin

Gold Member

REIN Alberta North Top Ten Player 2010

[email protected]

 

[johnsu]

Hi Chris,



I think best is to buy at 10-15% discount from current market. But that's investing, there are no guarantees on the profit. but to build a solid defence against a falling market and also have a reasonable time frame for appreciation.

 

[KeenanTameling]

Hi Chris,

Declining markets can be the bane of RTO.

There was a major RTO company in Alberta that had billboards everywhere not too long ago and they even had franchisees doing RTO under the umbrella. A few short years later in a declining market most to all those franchisees are gone and that company needed to restructure.

I would get creative with your monthly payments, set certain trigger clauses or just extend the RTO by a couple of years to ride out the RE cycle.

KeenanTameling