Will these numbers work for a rent to own?

[marcp]

I`ve come up with some numbers for a Rent To Own on a property that I`ve owned for 3 years, and which will be vacant in Feb 2010.
I want to get this going early enough to get a good tenant-buyer.

I`m assuming the current value is 360K based on a comp report (thanks Jared Chamberlain). With 5% app per year, I would ask min $375K or appraised value after one year, whichever is greater. Then $393K after the second year, or appraised value, whichever is greater.

Current payment: $1240/mo, PIT
Base market rent: $1500/mo
Using Ron Legrand`s down payment assistance program:
First option: $1700/mo, $200 goes towards down payment, I take $100 off purchase price
Second option: $2000/mo, $500 goes towards down payment, I take $500 off purchase price, can skip 2 months for the $500.

For a $375K house, total household income (3.5 multiplier, as recommended by Mark Loeffler) should be $107K/year for a qualified tenant buyer.

After one year (purchase price $369K under 2nd option):
Initial down payment: $7,000
Accumulated: $6,000
Total: $13,000

They are short $23K to purchase with 10% down.

After two years, (purchase price $387K under 2nd option):
Initial down payment: $7,000
Accumulated: $12,000

They are short $26K to buy with 10% down.

Is this the way this is supposed to work?
This is the first time I would be doing a Rent To Own. Is there a better way to do this?

Cheers,

 

[JoeRagona]

QUOTE (marcp @ Nov 20 2009, 12:54 AM) I`ve come up with some numbers for a Rent To Own on a property that I`ve owned for 3 years, and which will be vacant in Feb 2010.I want to get this going early enough to get a good tenant-buyer.

I`m assuming the current value is 360K based on a comp report (thanks Jared Chamberlain). With 5% app per year, I would ask min $375K or appraised value after one year, whichever is greater. Then $393K after the second year, or appraised value, whichever is greater.

Current payment: $1240/mo, PIT
Base market rent: $1500/mo
Using Ron Legrand`s down payment assistance program:
First option: $1700/mo, $200 goes towards down payment, I take $100 off purchase price
Second option: $2000/mo, $500 goes towards down payment, I take $500 off purchase price, can skip 2 months for the $500.

For a $375K house, total household income (3.5 multiplier, as recommended by Mark Loeffler) should be $107K/year for a qualified tenant buyer.

After one year (purchase price $369K under 2nd option):
Initial down payment: $7,000
Accumulated: $6,000
Total: $13,000

They are short $23K to purchase with 10% down.

After two years, (purchase price $387K under 2nd option):
Initial down payment: $7,000
Accumulated: $12,000

They are short $26K to buy with 10% down.

Is this the way this is supposed to work?
This is the first time I would be doing a Rent To Own. Is there a better way to do this?

Cheers,

Hi Mark,

I will chime in on what my spreadsheet comes up with. Firstly, using your potential income of $107k and a monthly debt of $600, I would qualify someone for a house in the $350,000 range.

Your deposit of $7000 would be about 2% of this.


There are different ways of looking at your deal. Firstly, what does your property NEED in order to cash flow as a regular rental? When you know that number, you can figure out what the RTO monthly payment should be. If you use the current value of the property, it may be more challenging to find a tenant depending on your ratios and multipliers.

As an example, if I was to qualify someone for a 360,000 home:

Monthly payment would be 3060.00
Rent = 2448
Option = 612

HOWEVER, using the income you suggest, their GDS ratio is exceeded.

The sale price can be whatever you negotiate but using a 6 and 5 % appreciation rate, the first year would be 381,600 (short almost 5k for a 5% CMHC) and 400,680 with $1500 over what they need to qualify for 5% CMHC.

This is a basic run just to give you an idea of how I do it.

The OTHER OPTION is for you to run your monthly numbers using your original purchase price and then adjust your uplift at the end of the sale.

I try to make it as easy as possible for the tenant and do not confuse them with numbers. If I use an uplift of 5%, then it`s 5%. I do not ask for an appraisal to see if it is higher than my original uplift. As long as my JV`s are making a return that satisfies them, and you happen to sell the property to the tenant for slightly lower than market value at the time of sale, then so be it. WIN - WIN. They walk away with some built in equity.

I`m sure the other professionals of RTO can help us both with their opinions.

Let me know if I can assist you in any other way.

 

[RedlineBrett]

QUOTE (marcp @ Nov 19 2009, 11:54 PM) With 5% app per year, I would ask min $375K or appraised value after one year, whichever is greater. Then $393K after the second year, or appraised value, whichever is greater.

Your T/B won`t be able to cash you out for more than appraised value. You will have to put a second mortgage behind the appraised value sale price and this arrangement will have to be kept off the purchase contract so that they can qualify for the 1st place loan.

Also assuming appreciation rates is a tough sell in this market. There needs to be more in it for the buyer. They will eventually talk to a mortgage broker before they sign with you so what you are offering them has to be in line with what they could get on the open market. With a soft rental market and cheap interest rates Landlord/Sellers are in tough.

Since `credits` aren`t easy to do with a lender what I have done in the past is keep the rent as cheap as I can and pass this savings onto the buyer. Then, require them to make `additional deposits` to keep the option active. So say $7k now, 10k more in a year etc until they are very close to a whole down payment amount with you. If you aren`t happy with your profit on an appraised value sale + pocketing the deposits along the way you will have to sell the T/B on taking on a second mortgage and paying you your profit over time or you don`t let them buy until the property has appreciated to a number you are comfortable with.