Rent-to-own guidelines

[MarkTorgerson]

Hello



I have recently re-engaged into the real estate investing world after taking a break.

I have several rent-to-own contracts in place. These are for properties that I hold title to. Many of the contracts were signed 2 to 3 years ago and many will be coming to term soon. I signed the contracts using as much "forward thinking" of what CMHC would want to see down the road. I also understand portions of the legal side has changed as well.



A few questions to what the latest and greatest rules may be.

• Does the excess rental payments (credits) and the deposit get held in a lawyer's trust account? If not, how is the tenant buyer protected?
• If they are not in a trust account, what would prevent the seller from spending the money?
• If they are not in a trust account, what would happen if the seller was going through financial hardship, spent the money, and went into bankrupcy?
• What happens if the house doesn't appraise for the agreed sell price at the end of the term?
  Does the contract need to say that a portion of the deposit must be refundable. I heard something along these lines from Dan Heon.
  What happens to the deposit and excess rental payments if the client is unable to close?
  I'm curious to the feedback on the ratio people are getting with closing these deals
  Has anyone out there been sued yet for a rent-to-own not closing?

Thank you in advance for your time



Mark

 

[neill]

Hi Mark

• Does the excess rental payments (credits) and the deposit get held in a lawyer's trust account? If not, how is the tenant buyer protected?
  
  We do not keep them in a separate account, we have not run across any legislation that compels us to - such as: residential rent security deposits are required to be kept in a separate account in AB.
• If they are not in a trust account, what would prevent the seller from spending the money?
  
  The direct answer is: nothing would prevent this. At closing all required funds required must be accounted for - how each business achieves this would be an individual decision.
• If they are not in a trust account, what would happen if the seller was going through financial hardship, spent the money, and went into bankrupcy?
  
  See answer above - it would involve some litigation at this point.
• What happens if the house doesn't appraise for the agreed sell price at the end of the term?
  
  The most common remedies are:
  
  1) Extend the RTO term
  
  2) Tenant buyer walks away and does not exercise
  
  3) Re-negotiate the price
  
  4) Seller takes a second mortgage to make up the difference.
  Does the contract need to say that a portion of the deposit must be refundable. I heard something along these lines from Dan Heon.
  
  There is a separate thread currently going involving CMHC requirements, at this point lots of discussion and as far as I know, no definite answer here - it seems that refundability will be a hot topic moving forward though for sure.
  What happens to the deposit and excess rental payments if the client is unable to close?
  
  In our contract it explicitly states that they are forfeited by the tenant - each business will set their own parameters.
  I'm curious to the feedback on the ratio people are getting with closing these deals
  
  We (touch wood) have yet to have a disconnect - we screen hard prior to inception though. We will have one at some point, up until now we consider ourselves lucky. Our company focus is on approval and sale, vs increased rent/cash-flow and tenant failure
  Has anyone out there been sued yet for a rent-to-own not closing?
  
  Yes, for sure that has happened.

Hope this helps you out!

 

[Sherilynn]

• This would depend on how your option contract was structured. If the deposit is 100% refundable, then it probably should be held in a separate account, but it wouldn't need to be held with a lawyer (and most lawyer's won't hold funds unless the purchase is pending).
• If the deposit is non-refundable, then it is the seller's money right from the start, and she can do what she likes with it. Buy another property, go to Mexico, or buy a truckload of jelly beans. The only question is when you want to count it as income. Some people count it as income right away and some count it as a "current liability" until it transforms into a purchase deposit. A good argument for choice two is that you if you think you may adjust the price of the property at time of sale, you don't know for sure if the profit on the sale will exceed the deposit or not (especially if it was a really big deposit).
• That would suck.
• Already explained in the other response (sorry, I already forgot who wrote it).
  Yes and no. A partially refundable deposit works for many banks, but not all. For instance, TD insists the deposit must be 100% refundable. I am the initiator of the aforementioned thread, and we had to amend the option contract to have a 100% refundable deposit. The hilarious thing here is that we had an unconditional purchase contract and the banks didn't bat an eye at that. So basically, we made the option deposits 100% refundable with the amendment, but those deposits had already been transformed into purchase deposits on an unconditional purchase agreement, making them non-refundable. An interesting exercise in futility there. I am undecided as to whether I will write future contracts with a refundable portion.
  Depends on your option contract. Since ours are currently non-refundable, I would keep them if the client chose not to renew the option and try again for financing in 6 months or so.
  The ratio would be varied. It would be completely dependent on how thorough and tough the application process was. We only accept a small fraction of applicants into our program, whereas other companies are more lenient and will accept lower quality applicants. That will have a huge affect on the client's ability to purchase.

 

[MarkTorgerson]

Thanks Neill and Sherilynn for your valuable feedback.



Mark