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

I just received this from my mortgage broker:



Banks don`t like the non-arm`s length private purchase. They know it`s not arm`s length because the tenant/buyer`s current address is the same as the subject property. The lawyer would also be obligated to disclose to lender. (I`ve had 2 declines based on submitting as a purchase between landlord and tenant.)
 
Just a note, these issues have arisen in the past on this forum. They were discussed and one of the issues was the non refundable deposit. In my research on this matter, a refund option in the contract needed to be added, however, no amount of refund was specified. On my first RTO completion we never mentioned the "option" . We simply gave reference to funds in an account (downpayment in my "trust"y account for this house) which had been there for more than 3 mos.

http://myreinspace.com/search/rein_members_only/Rent_to_Own/109-17587-89853-7_Critical_CMHC_Elements_for_Rent_To_Own.html#89853

It would be interesting to hear what David S. has to say on this issue.



Just a note, I have seen in the past, RTO havng been done by the province and CMHC in NB or NS years ago.
 
Thanks for that. I have forwarded a 20% refundable deposit strategy to my mortgage broker. (The rest I had already done. And we tried not mentioning the RTO, but if a bank asks we tell them, so it doesn't particularly work for us.)



Fingers crossed.
 
Here was my broker's reply to the "20% refundable" deposit:



"I was just reading through my spreadsheet of lender responses - it doesn`t say `fully refundable` on any of them; although a couple come close ` their wording gives me that impression. This did come up in the conversation that I had with some of my broker-mates, and TD would not deal with a partially refundable deposit ` the amendment sample I sent was what they finally accepted."



Unfortunately at this point the timing is getting too tight to take a chance on the funding not going through because of a wording issue.
 
More from my broker:



I just finished a call with the last lender from my little RTO survey. Conveniently he used to work for CMHC, and has quite a wealth of information. The refund clause needs to be there, but no amount is specified; he said it could be $100 or 10%, ` just something. This is terrific to know going forward ` It`s been like pulling teeth when I`ve gone back to lenders asking specifics on this point.



Now, each lender can still have their `take` on it ` and have requirements over and above the insurer`s guidelines. This is where we have some lenders that want to see the money collected for down payment maintained in its own account, or TD not agreeing to go forward with the deal my colleague was working on until the entire down payment was made refundable`
 
There was a comment in the previous posts about private non arms length transaction. Would it help to have the property listed on MLS and the transaction completed by a realtor?



Regards,
 
[quote user=markl]

There was a comment in the previous posts about private non arms length transaction. Would it help to have the property listed on MLS and the transaction completed by a realtor?



Regards,




Not according to the lenders with whom we spoke. They didn't have as big of an issue with the private sale as they did with the non-arm's-length transaction, specifically the big bad landlord selling to her poor defenceless tenant.
 
Great info Sherilynn - Thanks!



The thing that bugs me most about this rule is that if the tenant/buyer gets to the point of qualifying and excercizing their option, CMHC's narrow-minded rule means their option credit might not be used.



However, if the tenant/buyer does *not* get to the point of qualifying, the CMHC rule doesn't come into play, and they will likely lose their option credits.



In otherwords, the rule only comes into effect for the people who are buying, however the rule is really meant to protect the people who do not buy. the rule is completely 'in the wrong spot'. it should be a government law, not a CMHC rule - if anything.



In fact, I wonder about the legalities of the rule. Why does CMHC believe they have the right to do this?



As for showing the option credit as a deposit, I've been very skeptical of doing this as the money is not a deposit. Specifically, it's an 'other value' going towards the purchase, and will not be returned if the purchase does not go forward.



We've gotten around it by using lenders that use Genworth as insurance, but with the info above, perhaps we will add a provision that $250 of the tenant/buyers option payments will be refunded if the sale does not go forward. That may appease CMHC, and it's a low enough amount that it will have no impact on us whatsoever. Not to mention that we want 100% of our tenant/buyers to qualify and purchase.





Thanks,



David.
 
I completely agree that the rule is in the "wrong spot." The problem is "he who has the gold makes the rules," so basically they
can do whatever the heck they like and we can either take it or leave
it. At least that has always been my view of all financial
institutions.



The worst part is, if I don't cooperate by amending the contract to allow a refundable deposit, and the clients can't get financing because of it, then they could successfully sue me for the return of their non-refundable deposit. So I'm damned if I do and damned if I don't.



I would be cautious about considering the option payment to be "other value going towards the purchase" because that implies that the tenant is a "buyer with equity" and he could successfully sue for its return if the sale falls through.
 
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