RTO Ethics

trev

Inspired Forum Member
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Dec 31, 2007
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#1
Started doing rto's back in 2010. Found them to be a much more stable, predictable and much higher return (on cashflow) than my buy + holds. Flash forward to now..........what a range of outcomes.
One closed after 3 years as planned. One defaulted, did a midnight move on me and left their option deposit behind. one is still within their term
The other 5 are now past their term. Even beyond the 1 year extension provision put in the agreement.
Technically all of the options have expired and I have no legal obligation to sell and all credits are mine.
While I realize there is a considerable market of investors out there that look forward to that probability, I only got into deals I thought were winnable for the tenant. Realistic growth rate based on the area at that time and reasonable option payment and credits to get them there if they took care of their other issues
Here I am now with 3 year deals going into year 5 or 6, 2 year going into year 5, etc
They keep sending the same monthly payment. But there is no option in place.
A few of these are in areas that are now appreciating far better than the rates for the initial term
2 questions
1. If and when they try to buy back, how do you establish a new price? they shouldn't benefit from the hot market that came after the deal actually expired. I'm not trying to be greedy, but there is a lot of equity on the table. One tenant just failed to exercise an option price 60k below bank appraisal
2. When do you actually tell them enough is enough?
 

ThomasBeyer

Senior Forum Member
REIN Member
#2
What is the main reason for them not coming through on the purchase ?

Likely it is poor credit. Did you ask them ? Did you pull their Equifax score annually ? Did you insist on credit counseling ?

I think you have no legal nor a moral obligation here as you are not their life long baby sitter. But of course you could offer help, within reason, for example on mortgage application. Did you line up a mortgage broker and discuss their income and credit score implications with them ?

How often did you discuss buying and the process of applying for a mortgage ?

Do you want them to buy actually or are you just as happy to not to sell to them ?

Many people make poor life choices. Some only once or twice, then change. Many just continue to smoke, rack up credit card bills or beat their spouse. All I can suggest is that you talk to them, but you cannot be held liable or accountable for their life choices.
 
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kfort

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Sep 1, 2010
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#5
Yes he is not a charity but he could be more pro-active with mortgage application, credit counseling and/or savings. I am not saying he should have been, but he could have been !
I interpreted the question as when to get out of the bad situation, not how to avoid it
 

trev

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Dec 31, 2007
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#8
Thank you for your comments. I would say you are both right.
I will admit i have never taken an active role in policing or checking in on their progress repairing credit. I felt i was giving them an avenue to get back on their feet. I never wanted to be a credit counsellor. In a few of the cases it was a rescue / re-finance where i bought from them before the bank took it anyway.
And no, it is not a bad situation by any means, in fact could be a very profitable one depending how it plays out.
Just an awkward one.
 

ThomasBeyer

Senior Forum Member
REIN Member
#12
Financially i'm better off if they don't buy. Incredible cashflow, no manager, no repairs.
Are you collecting option payments past the purchase date ? I'd say you need to either formally terminate the original contract and just collect rent, or formally extend the original contract, accepted and signed by both parties with same or different terms.
 

Sherilynn

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Oct 22, 2007
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#13
Thank you for your comments. I would say you are both right.
I will admit i have never taken an active role in policing or checking in on their progress repairing credit. I felt i was giving them an avenue to get back on their feet. I never wanted to be a credit counsellor. In a few of the cases it was a rescue / re-finance where i bought from them before the bank took it anyway.
And no, it is not a bad situation by any means, in fact could be a very profitable one depending how it plays out.
Just an awkward one.
When you operate an RTO business, you take on the responsibility to make a reasonable effort to create a win/win situation, that being the tenant buying the property and you making a reasonable profit as fee for service. At the very least, reasonable effort includes periodic review of credit reports.

When you get into "rescue deals" where the seller of the property is facing foreclosure and you are buying the property to lease option back to them, your obligation to create a win/win increases - otherwise your company could be viewed as predatory. Generally speaking, if someone's bad habits or circumstances causes them to lose a house once, he will likely lose it again.

Did you insist those sellers obtain independent legal advice? Did you pay fair market value for the property? If the answer to either of those questions is "no," then you could have difficulty if the failed RTO tenants decided to fight for their option payments.
 

GaryW

Frequent Forum Member
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Mar 31, 2009
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#14
Technically all of the options have expired and I have no legal obligation to sell and all credits are mine.
If and when they try to buy back, how do you establish a new price?
1. Looks like they don't have that option to buy back anymore, assuming all of your documentation is up to snuff. Since your posts heading, is "RTO Ethics", I think, Ethically, a new contract is in order, IF they presently qualify. If not, can you put them on a monthly accountable program with a qualified financial expert to help see the end goal. As for the new price, ethically, this sounds like a meeting of give and take between you, the TB's and of course your picture of the economy's future growth, as little as it may be in the short term anyway.

2. With due diligence and Win / Win, I don't believe there is such a thing as "enough is enough". Contractually, you are done, which sure doesn't mean they will walk away, as you know, but I believe this is your call.

As for Donna's comment above, if you are still collecting "Option Money", it would be very interesting to see that outcome - No RTO contract in place and a rent collection as per lease that is probably lower than what they are paying you. I'm assuming they were/are paying you a monthly option payment, if not, then ignore this comment.

Good on you for posting this Trevor, as we don't see enough of the many REAL situations like this.
 

neill

Airdrie, AB
REIN Member
Oct 22, 2007
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#15
2 questions
1. If and when they try to buy back, how do you establish a new price? they shouldn't benefit from the hot market that came after the deal actually expired. I'm not trying to be greedy, but there is a lot of equity on the table. One tenant just failed to exercise an option price 60k below bank appraisal
2. When do you actually tell them enough is enough?
Great post and questions Trevor.

1) Our contracts state, like yours, that the tenant had an option to renew with us if they had met all of their payment obligations in a timely manner - although it also stated in writing that we had sole discretion to increase the option to purchase price based on market pricing. In preceding years, we definitely gave folks a bump in writing - while trying to keep in mind that having the property appraise at time of qualification was going to be paramount. While most did not like it, it gave them motivation to get the deal done sooner than later, and we also explained to them that if they had not entered into an RTO contract, that they would be out paying market value, assuming that they had been able to independently save the required down-payment. Our longest standing RTO tenant is also about to start year six with us - and has been oh-so-close for the last 12 months.

With your example above, do you expect the tenant who has an option 60k below market to qualify in the next 12 months? If not, you could two-step the increase, which would leave them some upside, and you with a greater profit, and overall still a win-win

Given what is happening currently with the Alberta housing market prices, we have renewed a lot of folks in the last six months or so with zero increase to the option price. We are also working with a couple to keep them in the house as straight renters, essentially "putting on pause" their option contract. We would rather see folks stay versus having to start anew, and seek the long-term win-win.

2) We have also had situations where we have gone to the TB and told them that they have one more year to get things sorted, or at least make some major progress. Typically this situation arises when the tenant has not followed any of the advice given to them (we tell folks that it is mandatory for them to work with our mortgage broker, who provides them with an action plan - including timelines - for the road to approval success). They either get religion, or leave soon after.
 
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GaryW

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Mar 31, 2009
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#16
We are also working with a couple to keep them in the house as straight renters, essentially "putting on pause" their option contract.
Hey Neill, is your OTP contract amended to reflect this or did you capture this situation with verbiage in the original contract?
 

akruzic

Rent-to-Own, Multi-family, Private Lending w/RRSPs
REIN Member
Jun 17, 2009
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Brampton, Ontario
#18
Hi Trevor,

I have been buying Rent-to-own's since 2010 and I've learned a lot since then. In-order for it work out successfully for the tenant so that they can buy the property at the end of the term, you must become a credit master and manage them throughout the term. I actually build a credit recovery plan for them, meet with them quarterly, and have them make corrections when they go off path. Now they all buy successfully at the end of the terms. Very few tenants, and people for that matter, know anything about credit recovery. So if you don't help them, most of them will end up being in the same, if not worse credit situation at the end of the term as they were at the beginning of the term.

The other key element to Rent-to-own is proper screening of the tenants. You want to only select tenants that are good people, who've had bad luck that affected their credit and are very motivated to resolve their credit issues and buy a home. What you have to look out for, and stay away from, are the habitual bad credit people who are un-helpable.

With that said, if they don't buy and the option expires, as long as they pay the rent and don't do anything illegal, you can not remove them. The house now becomes a standard rental. The only way to remove them is to sell the house, move in yourself, or have family or relatives move in. Other than that, they are now standard month-to-month renters.

Anyways, hope that helps. Let me know if you have any further questions.
All the best.

Alex
 

Sherilynn

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Oct 22, 2007
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#19
Good post by Alex. But to clarify: in Alberta it is possible to remove tenants if they are in a fixed term lease and the lease is expiring (which it should be if the option is expiring). Here the landlord has no obligation to renew a fixed term lease, and can choose to not renew for any reason -- or no reason at all.

Of course, one should not choose non-renewal without first making every reasonable effort to assist the tenant to succeed in buying the property. Even once all hope is lost, it can be difficult to convince the tenant of this and have them move. Depending on the tenant, there could be repercussions. (This is why tenant selection and screening is absolutely critical.)
 
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Dan 7612

Inspired Forum Member
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Dec 21, 2015
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#20
The reason I'm in the RTO business is for two reasons #1 make money #2 to help people.

I find it very rewarding working in the RTO space where the client can win. I do not set up my RTO expecting the client to fail. I want them to win. That being said, I do plan incase of failure of the client. But to lessen the chance of that happening I do a few things;

- mandatory credit check twice a year. I sit down with my clients to review their score and report. I have them pull the report so that it does not show as a hit on the report.

- If their credit is below 690, the are required to enroll in credit counselling through Credit Counselling Society http://www.nomoredebts.org/ it is a free, non profit organization. If the are not near a office, they will council over the phone.

It is a great feeling when you see your client succeed. I had a couple, he was 58 and had been a major project manager in Sudbury. Bad things happen to good people and they lost everything. So they packed up the truck and moved to Windsor. I bought them a duplex under RTO. they are responsible for the duplex in keeping it rented. The rent goes to them - so they lived almost rent free, built their equity, worked with me to build their credit and now are doing well.

Another was a single mom with three kids. She could not keep her head above water. At the end of the program, she bought the place and had enough extra that she could buy another place. She now rents out the place that I did the RTO deal with her.

These stories make you feel warm and fuzzy.
 
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