Cash back for purchase

[MarkTorgerson]

Hello

I have a potential purchasers for one of my properties. Since I am not using a realtor and the market in down, I am quite comfortable selling for 5% lower than the appraised value. I want to be able to pass that savings down to the buyer in the form of his down payment. For example let`s say the place appraised for $150,000. I am OK accepting $7,500 less than that since we are not using a realtor. I want to make things as easy as possible for my buyer. I want to give him that $7,500 to use as his bank required cash deposit. It was suggested from a veteran REIN member that I gifted a family member of his the $7,500 who then in turn gifted the $7,500 to the buyer (a gifted down payment must come from a family member). I would also make sure that I got the $7,500 back if the sale didn`t go through. He then gets the mortgage for $150,000 and I get paid back my $7,500 plus the remainder of the profits in the building.
I wanted to make sure this isn`t touching in that area of grey and if there were any other suggested methods to get this deal done so that my buyer is in with zero cash down. I am ultimately covering his cash down payment as the appraisal is totally legit.

Thanks

 

[MikeMcCrae]

There is no legit way for a vendor to give the buyer the down payment. Lenders do not want vendors giving the buyer the down payment. If you are willing to drop your price then just drop it and let the purchaser find his own down payment. This is not a grey area. It is black and white, and this is black.

 

[MarkTorgerson]

QUOTE (MikeMcCrae @ Oct 26 2009, 11:10 AM) There is no legit way for a vendor to give the buyer the down payment. Lenders do not want vendors giving the buyer the down payment. If you are willing to drop your price then just drop it and let the purchaser find his own down payment. This is not a grey area. It is black and white, and this is black.


Interesting comment. May I ask how the seller contributing on a monthly rent to own payment would be any different? For example, a renter pays an extra $300 per month on top of rent and the seller matches that payment and attributes $600 per month towards the saving of a down payment. Would this not also fall into the category of no legit way of the vendor giving the buyer money for a down payment?? The vendor is giving the buyer money for a down payment. Just in a different manner.

 

[RobMacdonald]

In a rent to own case, the lender will only give credit for the additional rent above the market rent, as well as the original deposit.

 

[MarkKruse]

QUOTE (MarkTorgerson @ Oct 26 2009, 02:37 PM) Interesting comment. May I ask how the seller contributing on a monthly rent to own payment would be any different? For example, a renter pays an extra $300 per month on top of rent and the seller matches that payment and attributes $600 per month towards the saving of a down payment. Would this not also fall into the category of no legit way of the vendor giving the buyer money for a down payment?? The vendor is giving the buyer money for a down payment. Just in a different manner.

In this case the renter is paying $300/mo towards their downpayment.
The "matching" $300/mo appears as a reduction in the sale price when the option is eventually exercised.

In some ways it is a subtle distinction but the key is that you are not directly giving the renter any money. You are being flexible on the sale price at the time of sale.

 

[MarkTorgerson]

QUOTE (RobMacdonald @ Oct 26 2009, 04:46 PM) In a rent to own case, the lender will only give credit for the additional rent above the market rent, as well as the original deposit.


Thanks for your comments Rob.
This is interesting as I am seeing many deals being structured this way. Are you saying in the case that I used as an example that the bank would not recognize the additional $300 that I am putting aside for the tenant? They would only recognize the extra $300 that he is putting in as that is the only amount that is above the market rent?

 

[MarkKruse]

Lets say your rent-to-own tenant decides to execute the purchase after 10 months on a purchase price of $100,000.

He would accumulate 10 mos x $300/mo = $3000 of deposit.
You "match" 10 mos x $300/mo = $3000 towards purchase price.

The actual Agreement for Purchase and Sale would say:
purchase price $97,000.
down payment $3,000
amount to loan $94,000 (via mortgage, VTB, etc)

His deposit is not $6k but he gets the net house price as if it was $6k.

 

[MarkTorgerson]

QUOTE (MarkKruse @ Oct 26 2009, 05:49 PM) Lets say your rent-to-own tenant decides to execute the purchase after 10 months on a purchase price of $100,000.

He would accumulate 10 mos x $300/mo = $3000 of deposit.
You "match" 10 mos x $300/mo = $3000 towards purchase price.

The actual Agreement for Purchase and Sale would say:
purchase price $97,000.
down payment $3,000
amount to loan $94,000 (via mortgage, VTB, etc)

His deposit is not $6k but he gets the net house price as if it was $6k.

Thanks for the comments Mark and I fully understand the concept. However, what I am seeing on many of the rent-to-own websites is something very different. In the case you mentioned above, it would take considerable time for the tenant to save enough for the 5% down deposit. Actually the case you made above wouldn`t qualify the buyer for 5% down unless he put down an initial deposit. 5% of $97,000 would need $4,850. What many of the rent-to-own websites are advertising is that the portion they are matching can be used for the down payment. Basically exactly like the example I first gave. They even use specific time tables to show how long it would take to save for the down payment using their matched portion as a down payment. I am curious on the broker`s and lawyer`s take on this? Is this an area of grey or are they entering the boundaries of mortgage fraud?

 

[MarkTorgerson]

QUOTE (RobMacdonald @ Oct 26 2009, 04:46 PM) In a rent to own case, the lender will only give credit for the additional rent above the market rent, as well as the original deposit.


Ok, I have truly hit an area of confusion. I have been told from a professional that:
"There is no legit way for a vendor to give the buyer the down payment. Lenders do not want vendors giving the buyer the down payment." I have also been told by a professional that: "In a rent to own case, the lender will only give credit for the additional rent above the market rent, as well as the original deposit." Both comments make total sense and their responses are much appreciated.

Now this is where my confusion comes in.... It seems that there is a different set of rules for selling lease to own properties. The following was taken word for word from an attributed rent to own website.
"At the end of the term you have the option to purchase. The money you have put down plus the $200-$400 a month we have put aside for you is used as part of your down payment to secure your own mortgage. We ensure that this amount equals at least 5% for a down payment as this is the minimum requirement to purchase a home. From there you purchase the house from us. This is an effective way of becoming a homeowner, without the risk."

I have also seen other rent to own websites offering "interest free loans for downpayments". So if the lenders don`t recognize anything above market rent as a downpayment, how can these sellers be assisting the down payments with their monthly portion? Also, if there is no legit way of a vendor to give the buyer part of the down payment, then how can they be giving interest free loans???

There seems to be a different set of rules for lease to own properties?? Are these seller`s bordering mortgage fraud or is there indeed an area of grey? Going back to my original post regarding trying to assist my buyer with his downpayment....I would give him an interest free loan in a heartbeat!! If you can do this with lease to own properties, why could you not do this with a conventional sale???

Any feedback is much appreciated....

 

[JoeRagona]

QUOTE (MarkTorgerson @ Oct 26 2009, 09:42 PM) Now this is where my confusion comes in.... It seems that there is a different set of rules for selling lease to own properties. The following was taken word for word from an attributed rent to own website.
"At the end of the term you have the option to purchase. The money you have put down plus the $200-$400 a month we have put aside for you is used as part of your down payment to secure your own mortgage. We ensure that this amount equals at least 5% for a down payment as this is the minimum requirement to purchase a home. From there you purchase the house from us. This is an effective way of becoming a homeowner, without the risk."


Any feedback is much appreciated....

Hi Mark, what this 200-400 "we have put aside" for you actually means is...that the tenant has paid that extra money ON TOP OF the regular market rent. The vendor is just holding it to apply back to the sale at the end of the deal. In essence, this is fantastic cash flow for us as we now have the original cash flow from analyzing the property correctly with market rent PLUS the additional money the tenant pays.

The money never really goes back to the tenant when they buy, it`s a paper transaction and the amount owed to purchase the house is lower.

It`s a win - win for everyone involved.

I hope this clears up the confusion for you.

 

[MarkTorgerson]

QUOTE (JDRInvestments @ Oct 26 2009, 09:24 PM) Hi Mark, what this 200-400 "we have put aside" for you actually means is...that the tenant has paid that extra money ON TOP OF the regular market rent. The vendor is just holding it to apply back to the sale at the end of the deal. In essence, this is fantastic cash flow for us as we now have the original cash flow from analyzing the property correctly with market rent PLUS the additional money the tenant pays. The money never really goes back to the tenant when they buy, it`s a paper transaction and the amount owed to purchase the house is lower.It`s a win - win for everyone involved.

I hope this clears up the confusion for you.

Hello Joey and thanks for your comment. Fully agree with the win - win approach but the banks don`t often include themselves in that equation. I didn`t include all the verbage from this website but it is apparant that they are offering their own top up to the "above market rent" to use towards the downpayment. Renter pays and additional $200 in market rent and the seller is allowing them another $200 above market rent. Some other websites are even much higher on the top up. I expect they are doing this as they have an inflated selling price or want to quicken the term of the agreement. So if I am hearing everyone correctly, the over the market "top up" from the seller to the buyer "can`t" be used for the downpayment. Only to use towards discounting the purchase price. And if seller`s were advertising that their top ups over market rent could be used as downpayments, then they would be false advertising???

I would also be curious for comments to the rent to own systems that are offering interest free loans for downpayments??? I would love to have the same option for my conventional sales.

Again, the feedback is much appreciated.

 

[tbarcier]

Mark, can you give an example of the RTO sites that are offering a "top up"? I have yet to see one and I would like to see the wording. I have seen the interest free loans offered however. You have now peaked my curiosity especially since CMHC states the down payment must be “Any source that is arm’s length to and not tied to the purchase or sale of the property such as borrowed funds, gifts, 100% sweat equity and lender cash back incentives.”

 

[MarkTorgerson]

QUOTE (tbarcier @ Oct 27 2009, 05:50 AM) Mark, can you give an example of the RTO sites that are offering a "top up"? I have yet to see one and I would like to see the wording. I have seen the interest free loans offered however. You have now peaked my curiosity especially since CMHC states the down payment must be "Any source that is arm`s length to and not tied to the purchase or sale of the property such as borrowed funds, gifts, 100% sweat equity and lender cash back incentives."


Hi Thomas

At this point I would rather not put anyone on display depending on what the rules truly are. I am more concerned in "if" they are stating that they will top up the downpayment "then" is this crossing the boundaries of what is allowed? Instead of the the focusing on who is doing this, I would rather focus on if it is allowable. I am also quite interested to get any feedback on the interest free loans.

 

[tbarcier]

I understand what you are saying, I wasn`t trying to focus on "who" rather more on the wording they are using in the description. It seem there is alot of confusion over this, just trying to get clairification.

 

[MarkTorgerson]

QUOTE (tbarcier @ Oct 27 2009, 09:19 AM) I understand what you are saying, I wasn`t trying to focus on "who" rather more on the wording they are using in the description. It seem there is alot of confusion over this, just trying to get clairification.


I fully agree. I would love to get some clarification as well.

 

[Mitch Collins]

This is definately something you need to be careful about - but here is an option for doing this.

Decide what the cash back is to be on the purchase - say the buyer needs $10,000 down payment at closing.

Then negotiate with the buyer what the purchase price will be. Once negotiations are done, add the $10,000 to the offer to purchase and sale and have the buyer submit and get approved for the loan.

Once the loan is approved, add an addendum to the contract stating that both the buyers and sellers mutually agreed to provide a $10,000 cash back to the sellers for purchasing appliances, repairs, etc.

Of course, this will only work in the case that the purchase price on the contract can be supported via an appraisal, and that the buyer is able to qualify for the mortgage to begin with. Perhaps he has to get a `gift letter` from family members to show the down payment to get approved and then pays back the family members with the cash back.

This is of course very `grey area` and I don`t recommend it, but I`ve seen a lot of deals done like this.

Proceed with caution, and good luck!

 

[MarkTorgerson]

QUOTE (MitchCollins @ Oct 27 2009, 04:26 PM) This is definately something you need to be careful about - but here is an option for doing this.

Decide what the cash back is to be on the purchase - say the buyer needs $10,000 down payment at closing.

Then negotiate with the buyer what the purchase price will be. Once negotiations are done, add the $10,000 to the offer to purchase and sale and have the buyer submit and get approved for the loan.

Once the loan is approved, add an addendum to the contract stating that both the buyers and sellers mutually agreed to provide a $10,000 cash back to the sellers for purchasing appliances, repairs, etc.

Of course, this will only work in the case that the purchase price on the contract can be supported via an appraisal, and that the buyer is able to qualify for the mortgage to begin with. Perhaps he has to get a `gift letter` from family members to show the down payment to get approved and then pays back the family members with the cash back.

This is of course very `grey area` and I don`t recommend it, but I`ve seen a lot of deals done like this.

Proceed with caution, and good luck!

 

[MarkTorgerson]

QUOTE (MitchCollins @ Oct 27 2009, 04:26 PM) This is definately something you need to be careful about - but here is an option for doing this.

Decide what the cash back is to be on the purchase - say the buyer needs $10,000 down payment at closing.

Then negotiate with the buyer what the purchase price will be. Once negotiations are done, add the $10,000 to the offer to purchase and sale and have the buyer submit and get approved for the loan.

Once the loan is approved, add an addendum to the contract stating that both the buyers and sellers mutually agreed to provide a $10,000 cash back to the sellers for purchasing appliances, repairs, etc.

Of course, this will only work in the case that the purchase price on the contract can be supported via an appraisal, and that the buyer is able to qualify for the mortgage to begin with. Perhaps he has to get a `gift letter` from family members to show the down payment to get approved and then pays back the family members with the cash back.

This is of course very `grey area` and I don`t recommend it, but I`ve seen a lot of deals done like this.

Proceed with caution, and good luck!

Hey Mitch

Thanks for the comments. And you are right....proceed with extreme caution!!! Definitely don`t want to go there as I would be inflating the price of the property. Be very careful on this one. Good to see some gutsy comments though...

 

[housingrental]

Isn`t this not grey area just outright fraud ? And to be avoided?
Isn`t the only thing unsure about it is whether or not your caught?

QUOTE (MitchCollins @ Oct 27 2009, 05:26 PM) This is definately something you need to be careful about - but here is an option for doing this.

Decide what the cash back is to be on the purchase - say the buyer needs $10,000 down payment at closing.

Then negotiate with the buyer what the purchase price will be. Once negotiations are done, add the $10,000 to the offer to purchase and sale and have the buyer submit and get approved for the loan.

Once the loan is approved, add an addendum to the contract stating that both the buyers and sellers mutually agreed to provide a $10,000 cash back to the sellers for purchasing appliances, repairs, etc.

Of course, this will only work in the case that the purchase price on the contract can be supported via an appraisal, and that the buyer is able to qualify for the mortgage to begin with. Perhaps he has to get a `gift letter` from family members to show the down payment to get approved and then pays back the family members with the cash back.

This is of course very `grey area` and I don`t recommend it, but I`ve seen a lot of deals done like this.

Proceed with caution, and good luck!

 

[MarkTorgerson]

QUOTE (housingrental @ Oct 27 2009, 09:22 PM) Isn`t this not grey area just outright fraud ? And to be avoided?
Isn`t the only thing unsure about it is whether or not your caught?


Yes...this is definitely to be avoided!! No question!!
But....the beauty of a forum is this is where you can bounce ideas off of other investors without prejudice. No crime has been committed. It is all part of the learining process.
And I am still curious on any comments on those interest free loans being offered for lease to own properties???