Would Appricate a second set of eyes

[Snicoll]

Hello Everyone. I have a deal that I would appreciated a second set of eyes on. The property is located in Leduc, Alberta. The property is a newly built (4years old), half duplex, 3 bedroom, 2 bath, 1300 sq.ft., large lot but no garage. I plan on purchasing the property under an agreement for sale.


Purchase Summary

The purchase price $280,000

Existing Mortgage - $267,000, which expires in 1.5 years (Oct 2012)

Monthly Payments - PIT ` $2200 / month

Deposit Required - $13,000

Legal - $ 1,500

Cash To close - $15,000.


I am proposing to turn this property into a rent to own, property with a term of one year. This is shorter then I would like, but I have but into the offer that I have the option to renew term for additional time if required.


Current Estimated Value of the property is $300,000.

Sale Price to Rent to Own Tenant - $310,000. Based on a one term rent to own option.


In checking the rental price in the Leduc area, there does not seem to be a lot of properties for rent, but also the rent is lower then I initially expected. The average rent seemed to be between 1700 to 2000/ month. I am concerned that the min. monthly payment of $ 2400 + option payment would asking to much. Also I would require a deposit of at least $15,000 +. Am I being optimistic with these numbers?


Any input would be greatly appreciated. Should I do further investigation or walk from the deal.


Sean Nicoll

 

[Thomas Beyer]

[quote user=Snicoll]Am I being optimistic with these numbers?


yes .. especially with no garage .. PLUS utilities for tenant !



Have you done a lease-to-own ? Do you know how to find candidates and select one of the applicants ?



Suggestion: get a QUALIFIED (!!!!) tenant first that has $15,000 and the desire & ability to pay $2500/month plus utilities (or more like $2700) .. then find him/her a house !! [This assume you have deal ready contract, both a lease and also an option to buy .. do you ?]

 

[JimWhitelaw]

Hi Sean, I have property in Leduc, so I have some insight into that market.



Your rent numbers are correct - $1700-$1800 is average for a detached bungalow. You might get that for your duplex since it's quite new - especially if it has a garage. Garage is a big one there - lots of trucks, dirt bikes, quads, etc. [edit - didn't notice you mentioned it had no garage. That's a tough one]



You're right, the deal is a bit thin, but the biggest risk I see is that you have no backup option - it doesn't work as a rental and you have a relatively short deadline to re-finance.



Since it doesn't work as a rental, you'll want to have your RTO buyer in place *before* you commit to the purchase. See if you can get a 60-90 day option to purchase at your price and terms, then use that time to get your T/B in place. Have the T/B work with a good mortgage broker and be certain they can qualify for financing with < 10% downpayment in a year or so.



Another option if your seller is flexible is you can offer to make them your partner. You market the home, do the legwork for the RTO and then share the proceeds with them 50/50. You may find they are more amenable to a longer lease term if their property is appreciating and they are getting a share of positive cash flow.



You don't need to be too worried about comparing the RTO payment to a rental payment - it's a different animal and you can show them they are getting monthly credits toward their downpayment, so they are "paying themselves" that extra money. For example:



Rent amount: $1950

Monthly credit: $650

Total payment: $2600

Monthly cash flow: $330 (I added in another $70/mo expense for insurance)



This way you can show comparable rent plus their monthly credits. The "loss" on your rent payment vs. monthly costs will reduce your total cash payout when you close, but you're still into the deal for zero cash.

 

[neill]

One other quick chime in here - it has been our experience (granted it is Airdrie vs Leduc) that the 15k down RTO buyer is definitely the rarity...



More seem to have 5-10 - are you willing to take someone with <15k? would be another question to factor into your decision



Hope this helps...

 

[Snicoll]

Hello Jim



Thank you for your comments, I was able to talk with the seller and get an option on the property. But so far we have not had much response on the advertising the property/deal. I think the combination of asking $15K down plus the high monthly payments is not making the deal very attractive.



Thanks for the advise. It is greatly appricated.



Sean Nicoll

 

[Snicoll]

Hello Thomas,



Thank you for your imput, I was able to get an option on the property and I have tried to do some marketing to attract interest, but you are right this deal might be a little thin. And I am asking for a lot up front.



Thank you for your imput



Sean Nicoll

 

[Snicoll]

Thanks Neil



It is turning out to be a rarity to find someone with 15K down, plus a large monthly payment.





Thanks for imput



Sean Nicoll

 

[Thomas Beyer]

[quote user=Snicoll]And I am asking for a lot up front. Actually, you are NOT ! Given the risk of default I'd say 6 months rent equivalent minimum !



Ask yourself: what person would be an ideal tenant-buyer ? Has money upfront and can afford a large monthly payment, higher than a mortgage or rent, BUT DOESN'T QUALIFY FOR A 5% DOWN MORTGAGE .. and it stable and reliable, for 2 or 3 years. What kind of person is that ?



This is either:

a) a recent immigrant (best candidate !!!!)

b) a drug dealer

c) a person with bad credit .. and thus past bad behaviour that may re-surface



Due to loads of people in the b) and c) category, screening the tenant-buyer is critical. This takes a while. It is far harder than to find a seller who has too high a mortgage and wants to get out. FAR harder !



Hence, category a) is by far the best group. A second language or third is super helpful here and specialization within that immigration group !



You need to get a list of potential clients (tenant-buyers) first .. then find him/her/them the perfect house !

 

[Thomas Beyer]

[quote user=Snicoll]It is turning out to be a rarity to find someone with 15K down, plus a large monthly payment.


Indeed .. hence cast a wider net .. in a city of 1,000,000 there will be a few dozen good candidates !!



RTO is a very specialized field with knowledge that takes a few years to acquire .. it is a senior strategy, not an entry level strategy .. mastered by a few (but by some !!) .. and if mastered .. very rewarding !