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Lease to Own: A few thoughts....

R

rgill

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Hello All.
I have read Mark Loeffler`s Rent to Own book. As much as I like purchasing more and more properties, the RTO concept seems compelling.

I have some questions/concerns:

1. If property values remain flat or decline are we not setting the tenant buyer (TB) up for failure? ( I love real estate and making money but truly want it to be a win/win situation). I understand they can walk away (would not wish that for the tenant), or continue leasing but the property may not be appraised at the pre negotiated price point for some (extended?) time, preventing them from getting financing (looking for solution other than VTB).

ie: Will declining property values spell the end of Lease to Own?

2. How often are the tenants successfully purchasing the property?

3. Just how easy/hard is it to find these Tenant buyers. I understand the sources to use to finding them but are serious qualified TB`s readily available out there?

4. Given the countless examples of 30-60%+ ROI on some RTO company websites, why are any of us buying, renting and holding properties, instead of the quicker and higher returns promoted by RTO purveyors?.

What am I missing here? Is this a case of- If it sounds to good to be true....?

I look forward to your insights. Thanks.
 
I am not an exclusive RTO investor but I have done a few. I now stay away from them except as a last resort for a poor property. Will take a crack at your questions

"1. ie: Will declining property values spell the end of Lease to Own?"

Declining property values will spell the end of real estate investing. Good thing they aren`t really declining and historically trend upwards. If you do not believe in the long term viability of real estate as an investment vehicle then you shouldn`t be investing.

"2. How often are the tenants successfully purchasing the property?"

I think you would need to speak with an investor that has been doing this for at least 3 years to know for sure. For my properties early in my career they fell apart as much as they worked out, but I was green at LTO back then.

"3. Just how easy/hard is it to find these Tenant buyers. I understand the sources to use to finding them but are serious qualified TB`s readily available out there?"

I think it`s a lot harder to find them than people make it seem. Rental property product is vastly different from home owner product. In order to make a "home owner" property (think single family home, nice townhouse or nicer condo) cash flow you need a higher rental amount. In the age of ultra cheap money tenants that can afford to pay extra for your RTO property would very likely qualify for a mortgage of their own based on income. Most of the ads I see for RTO property are like this. There is seldom a true `deal` for the tenant unless you find one that doesn`t evaluate all their options. IE - if they talk to a good mortgage broker before cutting you your deposit your goose could be cooked. Yes there are some people with poor credit and a `story` but then you are basing your business on renting to people with poor credit and a story


"4. Given the countless examples of 30-60%+ ROI on some RTO company websites, why are any of us buying, renting and holding properties, instead of the quicker and higher returns promoted by RTO purveyors?."

The investors selling these investments need you to share their belief of market performance over a certain interval. If you really broke down their numbers you`d see where they are making their assumptions and then you can evaluate the likelyhood of seeing a specific result. No different than evaluating the traditional income property model, just make sure you are comparing apples to apples.

"What am I missing here? Is this a case of- If it sounds to good to be true....? "

I know the RTO guys are going to disagree with a lot of what I`m saying here but it is my belief that any model that assumes a future value sale price based on appreciation rates is setting themselves up for a lose/lose proposition:

- If they set the rate too high the property won`t appraise and their tenant/buyer won`t be able to close or will choose not to if the option price is higher than the market value by $1 more than their deposit. Hopefully they can wait it out but if they can`t what then?

- If they set the rate too low they leave money on the table.

So RTO sellers are hitching their cart to the overall market horse same as a traditional buy and holder. Where they win out is through lower vacancy and fewer management issues but I contend that they have to use specialized product to attract tenant buyers so they end up spending more so cash flow is less...

Anyways as with most real estate strategies there is always someone that can make it work comes down to your specific skill set and how bad you want it!
 
QUOTE (rgill @ Sep 20 2010, 05:32 PM) ..

ie: Will declining property values spell the end of Lease to Own?

2. How often are the tenants successfully purchasing the property?

3. Just how easy/hard is it to find these Tenant buyers...

What am I missing here? ..
If you overprice real estate for any buyer no one will buy. Of course the real estate model falls apart if prices decline. The (meagre) cash-flow will not offset significant equity drops. be it RTO or classic model.

In Canada RTO is EXTREMELY difficult to implement due to the fact that even a recent immigrant with little English but some cash often can get a mortgage if he has a job.

The qeustion then is: why do YOU want this person if the bank refuses him .. as the risk for bank is 0 with a CMHC mortgage and 5% down !

Thus, you try to find TB`s in the pool of people with
a) poor credit (but turning it around), or
b) lots of cash (but no explanation where it is from .. maybe drugs ?) or
c) recent immigrants with cash but no ability to get a mortgage !

They are out there .. and therefore any RTO person needs to find a TB first .. qualify him/them .. THEN get a house (that is the easy part).

So spend 90% of your time and marketing budget to find a qualified tenant-buyer with cash that does not qualify for a mortgage but likes your proposition !! It helps if you speak a 2nd or 3rd language to target this group of immigrants !
 
QUOTE (ThomasBeyer @ Sep 20 2010, 10:13 PM) If you overprice real estate for any buyer no one will buy. Of course the real estate model falls apart if prices decline. The (meagre) cash-flow will not offset significant equity drops. be it RTO or classic model.

In Canada RTO is EXTREMELY difficult to implement due to the fact that even a recent immigrant with little English but some cash often can get a mortgage if he has a job.

The qeustion then is: why do YOU want this person if the bank refuses him .. as the risk for bank is 0 with a CMHC mortgage and 5% down !

Thus, you try to find TB`s in the pool of people with
a) poor credit (but turning it around), or
b) lots of cash (but no explanation where it is from .. maybe drugs ?) or
c) recent immigrants with cash but no ability to get a mortgage !

They are out there .. and therefore any RTO person needs to find a TB first .. qualify him/them .. THEN get a house (that is the easy part).

So spend 90% of your time and marketing budget to find a qualified tenant-buyer with cash that does not qualify for a mortgage but likes your proposition !! It helps if you speak a 2nd or 3rd language to target this group of immigrants !


Thomas, how would one go about qualifying a tenant buyer? Assum a credit app, and how does this get appraised, or confirmed?
 
Instead of re-writing Mark`s book I would recommend reading it. He covers all this in his book.

You will need to have a mortgage broker to work with you that understands improving ones credit and familiar with RTOs. The applicant will have to show proof of down payment.
You will also need to verify the following documents.Check references, NOAs, Pay Stubs,,,, and so on.
 
All the replies above are great. Brett and Thomas gave accurate information.
As an investor whose portfolio is 80% RTOs it was a decision for us that we are comfortable with. We where asked by one of our investors for a higher COC return. One way for us to deliver was to look at RTOs. After a few investments we really fell in love with the concept and have focused primarily on locating tenants and RTO properties ever since. I`m sure the you see the advantages for both sides and as in every investment we have some that fail and some that succeed. Our properties that are succeeding far out the number the "one" that isn`t. At the end of the day you will always have to do evictions and find new tenants for any kind of property. We are still left with a good asset that we can sell, rent or place a new Tenant/Bueyer in the home.

Thomas mentioned you have to market very hard for this business. very true! There are a lot of companies/investors out there competing for tenant/buyers. Some companies take tenant/buyers with the biggest down payment, some take whom ever can afford the monthly payments. But the real players are taking tenant/buyers that can succeed in owning the home at the end of the day.

If you have a single family home that is coming up with a vacancy maybe advertise it as a RTO. There are RTO companies out there that can A:walk you through this. B:partner with you and bring in a tenant/buyer. C:will find you a tenant/buyer.
 
1. You will have to be creative. There are many solutions to this problem but it will be on a case by case basis to see what works. There is no blanket answer. If this is also a big factor why don`t you sell at the appraised value not less than your purchase price?

2. It depends on the strategy and what your looking to get out of it some people set their clients up for failure as they just want to continually churn RTO tenants. If you are doing this properly you should see 75% coming to completion.

3. This is the hardest part of the whole thing and obviously why some companies are in business.

4. Everybody has different goals and are looking for different strategies. They may not want to be churning property every couple of years.

Everything is a guideline you need to establish the returns your looking for that make sense to you. Then it becomes a numbers game on getting in front of enough clients to get a deal done.

The tenant is the hard part the house is the easy part.

Regards,
 
Thank you all for your input.

I have stacked my portfolio with a buy... rent..... hold.....never sell mentality.

RTO would involve actually selling an asset....hmmmm, I`m not sure I`m cut out for that!


However, RTO theoretically seems compelling.

No sense spending hours learning about RTO , gathering info from others and then not take action.

The education will be complete once I fail and succeed a few times. Hopefully, more of the latter.

Time to try something new....

Cheers.

Raj
 
Having exclusive buy and holds for almost 3 yrs now but having sold several early this year I can see very clearly the advantage of RTOs, there is a preplanned exit strategy and superior cash flow.
Anyone thats learned from Ron LeGrand will tell you his philosophy is as he says "I`ll take the bird in the hand any day"
so RTOs do that.
 
Sixty percent of my portfolio is RTO and I`m looking to increase that. It`s a model that has excellent cashflow, which is what I`m looking for at this moment, and minimal pain in the butt factor. But I also like the buy and hold strategy for building equity. The success of RTO depends on finding the best tenant-buyers you can find, along with a great property which is no different than buy and hold. I recommend reading Mark`s book too!
 
QUOTE (DavidHamilton @ Sep 28 2010, 01:02 PM) .. The success of RTO depends on finding the best tenant-buyers you can find, along with a great property which is no different than buy and hold.
How do you find them ?

What minimum downpayment do you require ?

How much add`l $s over and above market rent do you charge for the (future) down-payment and enhanced cash-flow ?
 
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