Deposit and Monthly Credits in Rent to Own required to be refundable?
- Thread starter Joel
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Generally there are no security deposits with RTO because those must be refundable. Instead, there is an initial option payment, which technically is not required to be refundable. So if the tenant walks, the option payments are all yours, providing this is stipulated in your contracts.
However many banks and CMHC require that option payments are partially refundable if the tenant buyer tries to buy the property and is unable to get financing. They may not even process the application until the option agreement is amended as such.
Unfortunately there is no set rule as to how much must be refundable. CMHC just requires a "reasonable" amount, so I write that 20% of the initial option payment is refundable. The monthly credits are not refundable at all. Some banks will require that the full option is refundable, but you can accomplish this with an amendment when the tenant buyer is purchasing the property.
However many banks and CMHC require that option payments are partially refundable if the tenant buyer tries to buy the property and is unable to get financing. They may not even process the application until the option agreement is amended as such.
Unfortunately there is no set rule as to how much must be refundable. CMHC just requires a "reasonable" amount, so I write that 20% of the initial option payment is refundable. The monthly credits are not refundable at all. Some banks will require that the full option is refundable, but you can accomplish this with an amendment when the tenant buyer is purchasing the property.
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There are no "real rules." That's the problem. And the guidelines can change at any time. Thankfully this can all be fixed with an amendment when the tenant-buyer is exercising his option.
If the CMHC says at that time that monthly credits must be partially refundable, then you can write an amendment to your option agreement making those changes and have both parties sign it.
The funny thing is that by the time that the option is being exercised, the option payments become "purchase deposits." They are no longer option payments.
I once had to write an amendment making the entire option payment refundable, but I had an unconditional purchase agreement so the purchase deposits were already non-refundable, making the option amendment moot. That client was unable to qualify for a mortgage and I wrote a new option agreement and lease for the renewal (with the 20% refund clause).
If the CMHC says at that time that monthly credits must be partially refundable, then you can write an amendment to your option agreement making those changes and have both parties sign it.
The funny thing is that by the time that the option is being exercised, the option payments become "purchase deposits." They are no longer option payments.
I once had to write an amendment making the entire option payment refundable, but I had an unconditional purchase agreement so the purchase deposits were already non-refundable, making the option amendment moot. That client was unable to qualify for a mortgage and I wrote a new option agreement and lease for the renewal (with the 20% refund clause).
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[quote user=Joel]What amount do you make the initial option payment?
It really depends on the situation and your risk tolerance.
I require a 3% minimum for single family homes in major centers. The smaller the center, the higher the risk, so I require a higher deposit. Likewise for different property types: townhouses and acreages are riskier. An option payment on an acreage could be 10%.
I also tell my clients that the more they have for an initial payment, the more flexible I can be with monthly payments and final price. I have had clients pay 15% up front. Since this greatly reduces my risk, and also reimburses much of my cash outlay for the down payment, I offer a lower final price. Everybody wins.
It really depends on the situation and your risk tolerance.
I require a 3% minimum for single family homes in major centers. The smaller the center, the higher the risk, so I require a higher deposit. Likewise for different property types: townhouses and acreages are riskier. An option payment on an acreage could be 10%.
I also tell my clients that the more they have for an initial payment, the more flexible I can be with monthly payments and final price. I have had clients pay 15% up front. Since this greatly reduces my risk, and also reimburses much of my cash outlay for the down payment, I offer a lower final price. Everybody wins.
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Your down payment and monthly rent credits are non-refundable. If you do not execute your purchase option, this money will not be returned to you. This is one of the critical risks of rent to own transactions, and it is why tenants should be cautious before entering one.
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[quote user=LucasAtwell]Your down payment and monthly rent credits are non-refundable. If you do not execute your purchase option, this money will not be returned to you. This is one of the critical risks of rent to own transactions, and it is why tenants should be cautious before entering one.
With all due respect, Lucas...
The money paid for an option is not a down payment. And whether or not the option funds are refundable depends completely on the wording of the contracts.
I highly recommend that RTO investors have mainly non-refundable options; and I also recommend that RTO tenant-buyers have a lawyer review the contracts and advise them of their rights and obligations under those contracts.
With all due respect, Lucas...
The money paid for an option is not a down payment. And whether or not the option funds are refundable depends completely on the wording of the contracts.
I highly recommend that RTO investors have mainly non-refundable options; and I also recommend that RTO tenant-buyers have a lawyer review the contracts and advise them of their rights and obligations under those contracts.
[quote user=LucasAtwell]Your down payment and monthly rent credits are non-refundable. If you do not execute your purchase option, this money will not be returned to you. This is one of the critical risks of rent to own transactions, and it is why tenants should be cautious before entering one.
Locas,
My question was; as an investor how to structure the contract in a way that there is enough security that the tenant wont just walk away from the deal and in the same time make sure that banks will be ok with the deal when it comes to finance the tenant/buyer at the end of the term.
Do you have any experience with this?
Locas,
My question was; as an investor how to structure the contract in a way that there is enough security that the tenant wont just walk away from the deal and in the same time make sure that banks will be ok with the deal when it comes to finance the tenant/buyer at the end of the term.
Do you have any experience with this?