Cash Out RTO Strategy...Any thoughts?

[Luke_Frerichs]

Basically you find a disgruntled Home Owner (Joe Seller) who can`t seem to sell his house. You contact him and tell him about how you can find a Rent-To-Own Tenant for him. All Joe must do is give you an option to buy his house 3 years from now for 200k. Initial Option Deposit of 10k and monthly credits of $300 per month plus market rent. You have a clause saying something along the lines, if you don`t have a TB buy such and such a time the option becomes null and void.. He likes the idea and you go to work and a few weeks later you bring a qualified/screened /serious TB to the table you connect your TB with a mortgage broker who he can work with over the term of the option. You assign your option to the TB for $5000. The TB does not have a problem with this assignment fee because he knows its going towards his purchase price 3 years from now as it says in the option agreement.. Joe Seller is happy because he has $5000 in his jeans plus an extra $300 per month plus rent and he does not see my $5000 fee for 3 years from now, plus my services were far cheaper than a Realtors.





Would my assignment fee I take from the T/B still be seen as partial payment for him through CMHC`s eyes when it comes time for the T/B to qualify conventionally?






I see the maximum assignment fee I would charge would be from $2500/5000 since that is what I see most T/B`s have. I still would let the TB determine that for me..






I will not be seen as a Realtor since I am simply looking for someone to assign my option too?



Obviously the seller would not let you tie up their house for 3 years. So is it possible to insert a seller clause in the option that says if i don't have a qualified T/B in 6 months time the option becomes null and void? When a qualified T/B comes to the table where both parties agree the 3 year kicks in providing the T/B does not breach the option to purchase contract in his duration of the RTO term.






Pick this idea apart please` any thoughts?



Cheers

Luke

 

[RedlineBrett]

Sounds like a lot of work for $2500-$5000.



Also, finding tenants for people is defined as property management under the real estate act and you have to be licensed to conduct property management. You would need to protect yourself by actually having a lease with the seller and then sub-letting to your TB. If you are assigning and taking fees I think it can be seen as PM work.



Why not get your license and do it legit? I'm sure a local PM firm would love to have another license with them. Then you can actually advertise for tenant buyers.

 

[RealtorDave]

I'm seeing this done in Calgary actually, people keep putting letters on my listings.



Most home sellers hate this idea because:



1. They don't get their money for 3 years. Most people need to sell their home to afford their next home.

2. What happens if the T/B can't qualify. All people (and I do mean all) people who are looking for a RTO have credit issues.

3. What happens if the RTO causes damages, bounces checks, runs a grow op? Joe Seller still owns the house until he gets all his money.

4. Who pays maintenace repairs? The TB who's money you just took all of and has a history of credit problems?

5. While your fees are cheaper than a Realtor, we'd charge 10k (total between both Realtors) to sell his house now, and get all of his money now. Your charging 5k to sell his home, where he gets most 90% of his money in 3 years (not including legal fees which are higher for an RTO). Does that sound like a great money saving operation to you?



Its not that this idea can't work, but you need to find a seller with a fair amount of equity and no need for the money now and a great T/B who had a random one time evernt that has hurt his credit. I just don't see it being a worth while opportunity for you or Joe Seller.

 

[lanedry77]

Hi Dave,



I have to disagree with some of your points.



You say "All people (and I do mean all) people who are looking for a RTO have credit issues".



What about new immigrants that don't want to put 20% down, but want to lock in a purchase price today?



What about people caught in a divorce, and if they bought a house now, the house would be considered a marital asset, but they don't want to throw away money on rent?



What about people with good credit, but too small of a down payment to meet the banks strict requirements?



... your broad generalization is incorrect, and overlooks a large part or the lease to own population.



Also, you say "you need to find a seller with a fair amount of equity and no need for the money now and ..."



But what about people that have no equity and maybe even have a payout penalty. Surely you can see that paying $15,000 to a realtor plus a payout penalty is difficult if there's no equity in the home.



I think the idea may have merrit, but further market research would be required to know for sure. Either way, your points above are not representative of the entire lease to own market.





Thanks,



David.

 

[invst4profit]

This plan does sound like a lot of work for a relatively small pay back. The problem I see is in the fact that RTOs is a small niche market that this plan would be a smaller part of.



Doubtful it would be very lucrative but possibly part of a investors portfolio if they are already doing RTOs on a sizable scale.



Fairly risky for the seller as it has been pointed out by many RTO investors that bad credit is a major factor that the investor must work on with the client to achieve a final sale. If in fact building credit is a essential part of the success of the RTO process who would be doing that in this business scenario, the seller/home owner. Not likely.

 

[bizaro86]

[quote user=DavidSandbrand]What about people with good credit, but too small of a down payment to meet the banks strict requirements?




Do you really consider 5% down to be a "strict requirement" for buying a house?



Regards,



Michael

 

[lanedry77]

Hi Michael,



I sure do;



In the context of lease to own, the buyer is often (but certainly not always) struggling with a small down payment, and/or credit issues.



The banks have very firm requirements on credit scores and down payments.



CMHC, for example, requires a credit score of 680 to qualify for a 5% down payment.



... and they don't accept "close to 680" or "almost 5%".



if a tenant/buyers credit score is 679, or they only have 4.9% - they will not get qualified.



Because fo this, all good Lease To Own programs need to help the tenant/buyer ensure that their credit score and down payment meets the requirements required for a mortgage.





Thanks,



David.

 

[RealtorDave]

Hi David,



I appreciate your thoughts, but have a tendency to agree with Michael on this one. There is a way to get into the market with no money down still, and did have a client do it. They had a good job, but had a mountain of student loan debt, 2 kids, a wife that doesn't work, and no savings.



He qualified for a RRSP loan, and then used that money as a down payment (after 90 days of course). It worked for him because he had a good salary and the numbers worked (i.e. his GDS and TDS were within the specifications).



That is why I said what I said. I do have some experience with this, though I'll admit its pretty limited.



Anyways, just my two cents.



Dave

 

[bizaro86]

[quote user=DavidSandbrand]Hi Michael,



I sure do;



In the context of lease to own, the buyer is often (but certainly not always) struggling with a small down payment, and/or credit issues.



The banks have very firm requirements on credit scores and down payments.



CMHC, for example, requires a credit score of 680 to qualify for a 5% down payment.



... and they don't accept "close to 680" or "almost 5%".



if a tenant/buyers credit score is 679, or they only have 4.9% - they will not get qualified.



Because fo this, all good Lease To Own programs need to help the tenant/buyer ensure that their credit score and down payment meets the requirements required for a mortgage.





Thanks,



David.



Interesting. Personally, I think 680/5% is a pretty low bar to prove you're responsible enough for home ownership, and (on average) someone who hasn't reached that bar probably shouldn't be providing large amounts of money to a RTO specialist to reserve a house.



Just my opinion, and obviously there is demand for rent to own services, which means someone will provide them.



I would be interested in seeing numbers from someone who has been doing RTO for 5+ years on what percentage of their clients are able to complete at the end of the term, and how many need to renegotiate/extend/forfeit deposit.



Regards,



Michael

 

[Luke_Frerichs]

Thanks for all the feedback. As investors we see many deals where the equity is far to less to act. This strategy allows you to cash in on those deals. Providing you have a steady stream of T/B's and and excellent system etc..



As Brett Turner mentioned a PM license may be required. (Which makes sense since you are advertising to find a TB for a prop you do not own but you are doing it with the intent to sell your option/contract... I know a few PM's perhaps i could work something out.



2k to 5k assignment fee, yes it is peanuts but done in volume? Why not let the TB determine the fee, 10k to 15k..





Cheers,

 

[RedlineBrett]

[quote user=Luke_Frerichs]

As Brett Turner mentioned a PM license may be required. (Which makes sense since you are advertising to find a TB for a prop you do not own but you are doing it with the intent to sell your option/contract... I know a few PM's perhaps i could work something out.



2k to 5k assignment fee, yes it is peanuts but done in volume? Why not let the TB determine the fee, 10k to 15k..




In Alberta I think RTOs are quite risky for a number of reasons. One of the biggest I see is the fight to do volume without attracting too much attention. If an RTO expert got too big they'll get noticed by industry professionals (in this case landlords or realtors)... all it takes is a quick call to RECA and the RTO expert will have to prove how tight their model is as it relates to the real estate act...



It's pretty easy to do a low volume of deals... but "more money more problems". The risk of a realtor (who's recently expired listing you just RTO'd) finding out, getting upset and dropping a dime is too great to plan a career around...



Get licensed and it's a different story. Yes you have more start up costs and regulations to follow... but the sky is the limit for your business model now. And if you truly believe the volume is there you have more freedom to market your business and set your fees.