CMHC and the non-refundable Option deposit - Need help urgently!

[Sherilynn]

Greetings.



Our lease option clients are ready to purchase. They have qualified with the bank and CMHC. They have 5% down within our program as an option deposit.



The problem is that our option agreement specifies that the option deposit is non-refundable, and CMHC is refusing this since they are there to protect people against big bad corporations like mine. Our mortgage broker suspects that this is a new requirement for CMHC since she hasn't come across this before.



At this point, our only thought is to rewrite the option agreement to show a refundable option deposit and simultaneously write up an unconditional purchase agreement (which would make the 5% purchase deposit non-refundable), all backdated to the start date of the RTO (one year ago).



Anyone have a better idea on how to handle this one?

 

[Thomas Beyer]

Enter into a new purchase contract with the first deposit being the 5% they already paid you.

 

[markl]

I concur with Thomas

 

[Sherilynn]

Did that.



Evidently CMHC has a problem with the option agreement having a non-refundable deposit, so we must also rewrite the option agreement as having a refundable deposit in addition to the unconditional purchase agreement (with the same 5% option deposit now being a non-refundable purchase deposit due to the purchase agreement being unconditional).



That's all fine and dandy for this deal, but what about the other deals on the go and upcoming? There must be a better way than rewriting all of the option agreements and coupling them with backdated unconditional purchase contracts.



And although it basically means the same thing, it sounds like a harder sell to tell a new client (with no ongoing relationship with our company) that they must sign an unconditional purchase contract now with a closing date matching the end of the lease. It sounds so much more final and insurmountable than an option agreement with a clause for possible renewal.

 

[Sherilynn]

FYI, the option agreement was submitted as part of the proof of purchase deposit. If we could have proven the clients' deposit without revealing the option, then we wouldn't have this issue in the first place.

 

[neill]

If the option contract was already submitted, I would not recommend to re-submit with a back-dated contract.



We are aware of an RTO client that was approved on high-ratio with option non-refundable in the contract. Awaiting word back on details...



Can the broker send the deal to a lender that uses Genworth?

 

[Sherilynn]

[quote user=neill]

Can the broker send the deal to a lender that uses Genworth?




Interesting thought...I will ask.



Thanks,

Sherilynn

 

[markl]

If the PSA is older than 3 months no proof of deposit would be needed. As the deposit would have been somewhere for 3 months.



Regards,

 

[Thomas Beyer]

I don't understand. Why is the option agreement an issue ? What matters is that they had an option to buy, and they exercised this option. In addition they paid you some option money (initially and/or over time). Then, if you sign a new contract with them, with the agreed upon terms, it shows that they paid you a deposit (" the option money "). All the bank or CMHC has to see is this new purchase contract.

 

[Sherilynn]

I don't understand either, Thomas. I wouldn't think that the option agreement should come into play either. All that should matter is the purchase agreement. Evidently there are several banks that won't touch RTO's specifically because of this issue.



CMHC thinks they are protecting the little guy, but they are really screwing him by refusing this arrangement.

 

[Sherilynn]

[quote user=markl]

If the PSA is older than 3 months no proof of deposit would be needed. As the deposit would have been somewhere for 3 months.



Regards,




Thanks, Mark.



I'll check that out.

 

[Thomas Beyer]

[quote user=Sherilynn]I don't understand either, Thomas. I wouldn't think that the option agreement should come into play either. All that should matter is the purchase agreement. Evidently there are several banks that won't touch RTO's specifically because of this issue.



CMHC thinks they are protecting the little guy, but they are really screwing him by refusing this arrangement.


Perhaps the wording in the purchase contract could be changed ?



For a $300,000 house s.th. like



$ 15,000 First Deposit which the seller has received already, and whose receipt is hereby acknowledged.



$285,000 Balance Owing, in cash and/or new mortgage



then the rest of the purchase contract on a template commonly used in that city ..

 

[Sherilynn]

[quote user=ThomasBeyer]

Perhaps the wording in the purchase contract could be changed ?



For a $300,000 house s.th. like



$ 15,000 First Deposit which the seller has received already, and whose receipt is hereby acknowledged.







Yes, I think this was the problem. We had referred to the initial deposit as being already paid in the form of an option deposit, so naturally CMHC wanted to see everything. We could have just omitted that extra info.



Live and learn.

 

[Sherilynn]

Brainwave.



We write the purchase agreement as being unconditional (showing the initial deposit paid, and worded as Thomas suggested).

We remove any reference to the option agreement.

If the bank asks, we prove payment of the purchase deposit by providing the Quickbooks transaction ledger. This I had already done, but now we change the account name from "option deposit" to "deposit."



I like this. (I am not a fan of backdated agreements, even though the unconditional purchase agreement was intended from the beginning.)

 

[RedlineBrett]

Show them bank transaction histories on both ends (buyer's, and yours). That will give them proof of the deposit.



They aren't likely to care about a quickbooks ledger.

 

[Thomas Beyer]

[quote user=Sherilynn]Yes, I think this was the problem. We had referred to the initial deposit as being already paid in the form of an option deposit, so naturally CMHC wanted to see everything. We could have just omitted that extra info.



Live and learn.
Indeed.



Assuming both parties wish to proceed: Why not mutually cancel existing contract. Then write new, unconditional contract with new wording.



proof of deposit could be

a) by showing bank ledgers at your bank or

b) accounting entries or

c) just another letter from you that "We confirm receipt of XXX $s on or before _____ (date)"

 

[Sherilynn]

[quote user=RedlineBrett] Show them bank transaction histories on both ends (buyer's, and yours). That will give them proof of the deposit.



They aren't likely to care about a quickbooks ledger.




I figure that if my ledger matches the buyer's bank statements, I shouldn't need to provide bank statements. I would show them bank statements only if they asked for them. I would rather not dig up and fax 24 bank statements for every sale if I don't have to.



And so far, the ledger hasn't been an issue. Just the non-refundable nature of the option deposit.



Barry McQuire is planning to chat with CMHC to get more details on this. I'll keep you posted.

 

[Thomas Beyer]

[quote user=Sherilynn] Just the non-refundable nature of the option deposit.
In any unconditional real estate purchase the deposit is usually not refundable.



Why is this an issue here all of a sudden anyway ?

 

[Sherilynn]

[quote user=ThomasBeyer][quote user=Sherilynn] Just the non-refundable nature of the option deposit.
In any unconditional real estate purchase the deposit is usually not refundable.



Why is this an issue here all of a sudden anyway ?




Good question. I don't understand why CMHC is so focussed on the precursor to the purchase transaction rather than on the purchase transaction itself.



Perhaps Barry will be able to dig up some answers.

 

[Sherilynn]

So we rewrote the purchase agreement to be unconditional with deposits already paid. Presented to different banks that use insurers other than CMHC.



I guess that strategy must have been used too many times before because the banks seem to know it is an option and are still asking for documentation. The only choice I seem to have is to amend my option agreement to allow a refundable option deposit. And they want the amendment up front, so I have no guarantee that the financing will go through.



It looks as though things have changed, and the banks no longer want to be cooperative with RTO's. In fact, several banks won't even consider them.



The people who will truly lose here are the tenant-buyers. No investor in her right mind is going to buy a house for someone to lease option without some guarantee of a return over the years of the lease.