Rent to own down payment question

therenoguy

Inspired Forum Member
Registered
I just spoke with a young couple who are interested in doing a rent to own on a place I have for sale. They're just starting out. He works construction and she will be able to be employed in the next year or so . This is small town Alberta where buyers are few and far between. The purchase price on the house is about $200k, and they say they'd want to buy in 2 years.

However, in my questioning, they said they would have to get a loan for the initial deposit-I'll be asking about $8000. This tells me they have few resources. Is this a red flag for those of you who do this? I love the cash flow of RTO but I also want to see my tenants succeed and not get in over their heads.

Thoughts?

Keith
 

invst4profit

New Forum Member
Registered
Any investment situation you enter into wherein other parties have no skin in the game is always a high risk. The couple you are dealing with having no savings is a major red flag in the fact that they have made no attempt to actually prepare for the purchase of a home.

In essence they are attempting to take advantage of what they see as a low cost no risk effort on their part and will never be able to qualify for a mortgage in two years or likely even in 20 years.



On the other hand if you have no problems taking the risk of having to resell in two years when they walk away then as long as you thoroughly educate them on what they are getting into you can do so with a clear conscience.



However be prepared to evict if/when they stop paying.
 

Thomas Beyer

Senior Forum Member
REIN Member
RTO is a higher risk, higher-reward strategy.



The risk is higher because the tenant-buyer (TB) is higher risk. If they could qualify with 5% down, they would not need a RTO. So, they either do not have the 5% down or they have poor or no credit.



The reward is higher because you get a slightly higher exit price and higher cash-flow while holding IF they execute the purchase, or you keep the deposits if they do not execute the purchase option as laid out.



Some folks set the exit price so high that the chance to execute the purchase is low, as a bank will lend only on the lower of purchase price or appraisal. It is a question of morality, or world view, how you set the exit price.



RTO succeeds or falls with the TB selection !



What experience do you have with rental properties overall ?



Did you read Mark Loeffler's book on lease options ?
 

Sherilynn

Real Estate Maven
REIN Member
In an area with an uncertain future, I would insist on at least 5% (more likely 10%). If the clients walk and you are stuck with the house, you must have the option of discounting it substantially to resell it quickly. The higher deposit gives you more flexibility.



And I never
accept borrowed deposits.



Part of the reason that some people need an RTO is because they have had money/credit issues. Getting another loan is not the solution. Even if they claim that the loan is from their parents, those parents would have some expectation of repayment and the clients would be setting themselves up for failure. If they can't save 5% now, how will they repay their parents and also save more for their downpayment?
 

therenoguy

Inspired Forum Member
Registered
The is for the insights all. I'm getting more information from them. On the one hand they don't have a lot of resources. On the other hand they have excellent credit for people their age, they have a vehicle that is paid off, they carry no credit cards, and they have some saved, just not the $8000 I would be asking as a deposit.

I'll keep you posted and welcome further feedback.
 

invst4profit

New Forum Member
Registered
What would their credit score be based on since they do not use credit cards.

What are there scores.
 

BenSanderson

New Forum Member
Registered
Further to Greg's comment, I would not go by just their credit score alone. Their credit and employment history will also be major factors in getting approved for a mortgage.



If you trust your gut that they have excellent prospects of being fully employed with high enough incomes in the next 3 to 6 months, then it might be worth a shot. They need to be made fully aware that the success or failure of your arrangement with them will hinge on their ability not just to pay back the loaned deposit they're giving you, but to make the monthly payments on time, every time. If they can convince you that this is in no way a problem for them, then what's the harm in moving forward?



Keep in mind, however, that many RTO clients typically come with bad financial habits, even if their credit score suggests otherwise. Most RTO investors make the mistake of leaving it up to their tenants to fix their own credit, which is almost always setting them up for failure. You'll need to set them up with an RTO-friendly mortgage broker, and you should be willing to hold their hand through the process to make sure they don't slip up in the next 2 to 3 years.



Bottom line: if the income is there and their credit/employment is "fixable", then you have the makings of a successful deal. As long as your tenants are fully aware of the risks, and you're well protected through your Lease and Option agreements, then you've done well to mitigate your liabilities.



Good luck, and trust your gut!
 
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