Looking for feedback on a short term rent-to-own

[MarkTorgerson]

I have a client that is interested in signing a rent-to-own contract. He has 5% cash down and is looking in a solid market. It looks like he will be able to qualify for his own mortgage in 6 months but does not want to wait. He is interested in having us purchasing a property on his behalf and then lease optioning it back to him in 6 months. My concern is the property not appraising for the marked up value on such a short term contract. I could try to steer him into a 2 year lease, but don't feel that would be in his best interest. Any suggestions or feedback for short term RTO contracts?



Thanks

Mark

 

[Sherilynn]

I have never done an RTO shorter than a year because a) the return on my time and effort isn't high enough and b) because of the opportunity cost of using up mortgage room and down payment capital on such a short term investment.



I would rather wait for another client that wants a 1 or 2 year deal. Same amount of effort but much higher pay.

 

[MarkTorgerson]

Thanks Sherilynn,



A one year deal also sounds fairly short. What type of terms would you try to attach for a 1 year deal for it to be worth your while?

 

[Pheenix]

Hi Mark

Respectfully I suggest you need to re-frame the question - how do I create a deal that works?



Is it possible one of the quick turn models may provide guidance, 6 months sounds like the length of an extended close to me. Surely you can find a fellow flat lander who is more experienced with those methodologies.



If you have access to good 'hard money', look to arrange bridging for the vendor to get their new place, the sale is to you or your investor with assignment on closing, permission to rent during the bridge/assignment period, get the purchase agreement on the other side, and be prepared to place a short term second if the 'rent to own' client isn't actually able to qualify for the whole mortgage on closing - no need to build in escalations and worry about appraisal relative to marked up value, allow for some fluctuation in the market, consider some contingencies, and get it heavily papered.



Charge a consulting, finders or advisor's fee, whatever terminology is acceptable for all concerned, collect on the monthly basis in addition to the rent (no equity build) if necessary, with an additional lump sum at closing. If you have to take the second build in some incentives to payout quickly, or conversely build more profit into the second.



This all begs two questions; why they are going to be able qualify in six months but not now - does this factor actually still work against them then and given the relatievely short time horizon what is the rush? Without answers to those questions you can't assess your risk (at least what you are attempting to transfer). Will you really be able to extract sufficient money out of it to warrant the work in the first place?



Let me know if you pull something off

best regards Brad

 

[Sherilynn]

Some 1-year deals work, and some I refuse. I more-or-less stick to my standard terms and if I can't make it work for everyone, I will advise the applicants that they would likely be better off either renting for a while or approaching a seller directly with a rent-to-own offer (because the only way I could make it work would be to charge the clients a premium, making it less worthwhile for them). I also advise that if they approach the seller directly, to be sure everything is in writing and to pay the extra money to have all documents reviewed by a real estate lawyer who has experience with options.



Of the ones that worked:



In one case, the return would have been too small to involve my money partner and pay him for his money and me for my time, so I used my line of credit to fund the deal. Of course, that would only work for one deal, so I had to refuse the next two small ones.



For another, the initial purchase price of the home was $438k, so the standard terms worked fine even with splitting the profits with my money partner.



In answer to the question of who would qualify in only 6 months, I have encountered a few situations:

• just started a new job
• not enough self-employment history
  acceptable credit score but bankruptcy discharge less than 2 years ago
  selling house in another province and can't quite qualify for a second mortgage

 

[MarkTorgerson]

Thanks everyone for your input. I have worked out a rent-to-own agreement for 1 year. The tenant buyer will be coming in with some cash, plus strengthening their position through some sweat equity. We have also worked out an agreement to lengthen the contract if they aren't in a position to close after 1 year.

 

[neill]

Congrats Mark!



Once they are in, if they can qualify at six months AND the house appraises, then everyone wins on an early cash-out...



We do not do many tenant first deals, so we have profit built in if they cash us out immediately, at six months, at one year, etc... making money when we buy is pretty important for our business model.