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Help with my first AFS!

JMitchLock

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Hi All,

I have a property that I am trying to sell privately (for $275,000). I have been contacted by a buyer who can get financing for up to 75% of the purchase price ($206,250), but will need help with the rest ($68,750). My mortgage on this property is due March 2017.

After taking Barry McGuire's Rapid Cash workshop a couple of weeks ago, my first thought was to do an AFS! But I don't really know how it would all work. My specialty is rent-to-own :) I am meeting with the buyer tomorrow and would like to be able to offer her a couple of seller financing options then.

Would someone be willing to have a quick phone chat to give me a basic run down on how such a deal would work?

Sincerely,
Jaclyn
(519) 227-1628 (EST)
 

Thomas Beyer

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AfS is an agreement FOR sale, i.e. a sale in the future. The Australians call it a wrap-mortgage in that the buyer wraps his interest around the existing mortgage.

Here is how it works: The buyer writes an offer, like any normal offer. Instead of the usual cash plus new mortgage, he changes mortgage to AfS.

Example:

$25,000 deposit
$250,000 AfS as per Appendix A. [ use the normal area MLS contract, and cross out mortgage and write in AfS ]

Appendix A states s.th. like

Seller agrees to sell property on March 30, 2017 for a further $250,000 payable in full. Seller to receive 6% annually, or $15,000, paid monthly , or $1250 per month. Buyer to pay property taxes. Seller will continue to pay the mortgage until March 2017. Buyer agrees to leave premises on non-payment.

------

In essence, you agree to sell the house in the future, with $250,000 due in March 2017, with $1250/month payable to you. From that you pay the existing mortgage. In March 2017 you will receive the $250,000 and with that pay off your mortgage, and keep the difference. The title then transfers to buyer in March 2017. Until then, the buyer registers a caveat on title of his interest in the property, ie wraps an interest in the property around the existing mortgage.

Have a lawyer write up Appendix A more "lawyerly" if you want, or take the appropriate classes that teach you how (or other folks chime in here).

You still are the owner, and if buyer defaults on payment you need to evict him, which is the tricky part. As such, better is to do a rent-to-own, which is similar, but has more teeth, i.e. you have a lease and an option to purchase.

Like juggling, easier said than done, but certainly doable with some practice !
 

JMitchLock

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Thanks a lot Thomas. This has been helpful.

Just looking at the numbers, there seems to be a much larger profit margin in rent-to-own because the monthly payments and deposit would be similar, but the final sale price would go up.

Am I wrong to assume that an AFS would be a good strategy for buyers (and motivated sellers), but not necessarily for real estate investors looking to sell a property and maximize on their profits of the sale?

In this case, this is an investment property that I am not in any rush to get ride of. However, when presented with an offer to do an AFS I was curious because I would like to do them myself. I thought this would give me a good chance to practice. But in this case, it seems that the numbers would be more favourable if I were to negotiate a rent-to-own instead.

Thanks again!
Jaclyn
 

Thomas Beyer

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Yes, rent-to-own can be more profitable than an outright sale or AfS. Keep in mind though that a typical rent-to-own customer is higher risk and may not qualify at the end of the day to take you out. As such, it is a more senior strategy that takes skills and extensive vetting of the prospect. It is also more work. But yes, combining higher risk with mitigation strategies plus more work can, or shall I say should, result in higher profits.
 

JMitchLock

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Thanks Thomas! I completely agree with you that rent-to-own can be higher risk if you do not properly "qualify" the tenant-buyer. I actually run my own rent-to-own company and we have an extensive system for qualifying quality tenants with the help of a credit counselor and mortgage broker. We also have included a mandatory credit counselling and money coaching piece as part of our program in an effort to mitigate some of that risk on the back end.

Rent-to-own is undoubtedly a senior strategy that can get pretty messy if you do not know what you are doing. That is why I would recommend that investors looking to apply this strategy should work with a rent-to-own company - like MitchLock Properties :), at least for their first rent-to-own deal.
 

Sherilynn

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You can still make money on selling via AFS, either by charging a higher price or by marking up the interest. When we market a property with seller-financing or RTO available, "the posted price is a 'buy now' price."

However, if this buyer is able to get financing up to 75%, and needs help with the rest, does that mean he will be 100% financed? If so, this is very high risk (higher risk than RTO) because the buyer has 'no skin in the game' and if there is a foreclosure, you will lose your money. Secondly, I can't think of any bank (or ethical private lender) that would allow the buyer to have less than 10% of his own money in the deal (unless he was CMHC-insured, of course).

For the above reasons, I won't sell via AFS unless the tenant has 20% down, or very close to it. If he has between 5% and 15%, it's an RTO. If he has less than 5%, then he should come back when he has the cash.
 

JMitchLock

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What would be the distinguishing characteristics between an AFS candidate and an RTO candidate? It seems that both are unable to get a mortgage on their own. So if that is the case, would an AFS candidate not be equal in risk to an RTO tenant-buyer (by risk I mean, risk of them not being able to get a mortgage and close the deal) because they are both trying to fix something (most likely credit) so that they can eventually get a traditional mortgage and buy the property.

Sherilynn, I like your 20% rule of thumb for an AFS. In this case, if they can get financing for 75%, and if they were able to put 20% down, would that mean over their "term" they only have to save the additional 5% to qualify for the mortgage needed?

I really appreciate all of your help!

- Jaclyn
 

Sherilynn

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[quote user="JMitchLock"]What would be the distinguishing characteristics between an AFS candidate and an RTO candidate?[/quote]

Money.

RTO candidate has 15% or less. AFS ideally has closer to 20%.

Yes, if they had financing for 75%, and had 20% cash for a down payment, and the bank allowed them to seller-finance the other 5%, then that would work. Of course, that would simply be a regular sale with a 5% vendor take-back. It would not be an AFS.

AFS only comes into play when the seller keeps title and mortgage (if any) in her name and sets up a "mortgage" between herself and the buyer, with the AFS document as the "mortgage" instrument.
 

Thomas Beyer

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[quote user="JMitchLock"]What would be the distinguishing characteristics between an AFS candidate and an RTO candidate?[/quote]

They are similar but since RTO has more teeth to enforce in case of non-payment RTO is somewhat lower risk. As such, an AfS needs more cash upfront, and/or a higher interest rate and/or a high exit price.
 

Sherilynn

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[quote user="ThomasBeyer"]
They are similar but since RTO has more teeth to enforce in case of non-payment RTO is somewhat lower risk. As such, an AfS needs more cash upfront, and/or a higher interest rate and/or a high exit price.

[/quote]

Exactly, Thomas. Money talks - and our ability to enforce (get money later) plays a part.
Easier to evict than to foreclose.
 

Matt57

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In the event that the AFS falls apart in the end, what happens to the buyer's deposit? Do they lose it like they would in a RTO deal?
 

Thomas Beyer

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Define " falls apart " . You mean you as the buyer will not buy as planned ? Yes, for sure you will
Lose your deposit but you also might be on the hook for additional damages, depending on contract language !
 

Matt57

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Is there an example of an AFS appendix 'A' that you would typically use? I just imagine the buyer asking for their deposit back if they're unable to close on the sale when it comes due. I'm wondering if the seller has the legal capacity to keep the deposit regardless of the outcome.
 

Sherilynn

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An AFS purchase is very similar to a standard purchase, except the sale proceeds with an AFS agreement rather than a bank mortgage. If the buyer puts down a purchase deposit, removes conditions, and doesn't close, then he forfeits his deposit like he would with a conventional sale.

If you mean the buyer can't complete the transfer of title when the AFS matures, that's a different kettle of fish.

Once the completion day has successfully passed, the AFS term starts and the buyer has beneficial ownership. The AFS term could be a few months or a few years, depending on your agreement. At the maturity of the AFS, the buyer is supposed to either renew (if that option is available in your AFS) or complete the transaction by "cashing out" the seller (either with cash or with his own bank mortgage). At that point, title transfers and the buyer now has legal ownership.

If the buyer is unable to complete the transaction according to the terms of the AFS, and has no option to renew the AFS, then he is in default. The tricky bit here is the buyer has beneficial ownership, so the seller must foreclose. It isn't like a lease option where the tenant has no ownership interest in the property. A buyer in an AFS has an ownership interest.

The consequences of this default will depend on the wording of the Agreement For Sale document. It should address what is to happen if the buyer defaults. Note if the completion day has passed and the AFS is active, any money the buyer has paid is no longer a deposit but rather is his equity in the property.

If you really want to know the ins and outs of AFS and other creative strategies, consider attending Barry McGuire's "Rapid Cash Program" in Vancouver in September. Details are on the REIN site.
 

Thomas Beyer

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Sherilynn has addressed all relevant issues. The question of what happens if you are in default in ANY contract is usually the realm of lawyers and courts, beyond a class or this forum certainly.

If you sign a contract, any contract, there are consequences - obligations if you will. If you default on your obligations it will result in consequences: some simple to resolve and some complex and very very expensive !

In the case of an AfS due date that comes and goes lots of money is at stake and mortgages usually have to be either renewed, extended or increased. The defaulting party can lose far more than the initial deposit in this case.
 
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