Ron LeGrand style Agreement for Sale (AFS) with Rent to Own exit

[rfk]

Hello,



I`ve got my first Agreement for Sale under way. I`ve been negotiating over the phone and I`ve built up a really good rapport with the seller but I`m having difficulty putting together an offer.



Here is the deal.



Joe has a condo in Toronto that he is selling FSBO for 320,000. He needs 20K at close but is willing to keep the mortgage in his name and delay getting the rest of his equity about 80K until my tenant buyer buys me out in one to three years.



Since I`m going to be borrowing his 80K do I pay him interest for that? I`ve got the form from myREINspace called `Real Estate Purchase Contract Agreement for Sale Financing Schedule (Buyer)`. Would I put this 80k down as the principal amount? How can I put a term down when I don`t know when my TB is going to cash me out? What do you commonly offer as an interest rate? Would I pay the interest at the end of the term or in installments.



Another question, I`ll be paying the mortgage down for one to three years, who benefits from the principal pay down? I am agreeing to pay any payout penalty.



r: #000000; background-color: transparent; font-weight: normal; font-style: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">What if my TB can`t qualify in three years and the seller`s mortgage comes due?





I am going to lease to own this for 370K at $1600/month. I`ve got a lot more questions about rent to own but I`ll save that for another post.




Thanks,

Rob

[email protected]

416-538-3904

webuygtahomes.com

 

[Thomas Beyer]

AfS is like a 2nd mortgage ! The offer is written like a normal offer, instead of bank financing it is seller financing "via Afs". This means: he stays on title, as does his mortgage, and your (future) purchase will be registered as a caveat !



Hence it is also called a wrap mortgage ! You "wrap" your interest in the property around the first mortgage.



Hence, if you buy for 370K, and give him 20K, you have to negotiate what you pay him for the remaining 350,000 ..and when !! This is all negotiable. Usually you pay him MORE than his mortgage commitments !



So if his mortgage is 300K @ 5%, with a 22 year amortization remaining, he may pay roughly $1900/month to the bank. Therefore, you may offer him 350K at 4%, paying $2000/month .. out of which roughly $1200 is interest and $800 is payment towards principal.



You pay him in 3 years what is agreed: either the full 350K, or more likely the 350K minus $800*36 months .. whatever is agreed !!



AfS is not a novice strategy, as much can go wrong:

a) seller stops paying mortgage - hence ideally YOU pay it directly to his bank

b) seller stops paying taxes - hence you ideally pay it directly to city

c) you run out of cash (the most common problem !!!!!! .. after d) to g) happens)

d) you cannot find a TB that pays over $2700/month to cover his payment plus condo fees plus property taxes

e) TB trashes the place .. and leaves never to be seen again

f) TB stops paying rent

g) TB renegs on agreed upon purchase



With the figures presented (370K purchase price), and this low rent YOU WILL LIKELY FAIL !!



The rent must cover: mortgage payment + condo fees + property taxes .. this is minimum $2700 or better $3000/month !! is this doable for this condo in this location ?? Likely not !!



Play through scenarios d) to g) and plan accordingly. 6 months mortgage payments plus renovation cost is the cash buffer I recommend even if the rent covered your expenses (which it doesn't in your case)



STAY AWAY FROM THIS DEAL .. to avoid bankruptcy and divorce and undue stress in your life !!!!



The ONLY way this deal would work is if TB pays you a significant sum, say $20,000 cash upfront plus $3000/month .. and that person is very difficult (but not impossible) to find !

 

[rfk]

Hi Thomas,



Thanks for your reply. Great explanation I think I'm understanding the concepts. I was thinking that I'd be paying his mortgage but in fact I'd be creating the wrap mortgage to cover his existing mortgage payments. His equity is also included in the mortgage but the rate is dropped so that the monthly payments I make to him roughly match the payments he will make. This also explains the length of terms for me - I make the terms far enough out so that I have enough time to cash out the buyer before the mortgage term expires.



Correction to your post: I'm getting it from him for $320 and then doing a rent to own for $370.



His existing mortgage is $220K and open but he is willing to roll it into a variable rate mortgage to get the payments as low as possible for me. I'm not sure how that gets written up.



We both have escape clauses - if I can't find a TB then I can walk. If he finds a buyer before I find a TB, then he walks.



Really appreciate your advice,

Robert

 

[Thomas Beyer]

[quote user=rfk]I'm getting it from him for $320 and then doing a rent to own for $370.


glad to hear that .. keep in mind that an appraisal for the TB needs to be close to 370 .. or he will not buy .. and keep the initial deposit high to cover any missed rent payments or damages .. I'd say 6 months rent minimum !



best candidates are cash-rich but credit-score poor immigrants .. as a RTO gives them time to get a credit score, a job, learn English and qualify for a fat mortgage 2 years hence !!

 

[JimWhitelaw]

A couple thoughts:



1) Instead of a "wrap mortgage" consider a lease w/option to purchase. Less liability on your part. Then do your RTO for an amount that gives you some spread ("sandwich lease").



2) I can't be sure, but it sounds like in the "wrap" scenario (like a lease w/option), the seller will be getting the mortgage paydown? You don't want that; you want to get the paydown. Structure an AFS like this:



Selling Price - $320K

Down pmt - $20K

Unpaid Sellers Equity: $300K



USE to be paid by:

- Payments on Existing mortgage of $220K

- VTB of $80K with simple interest of xx% & no payments & balloon payment at some future date.



Final payout is mortgage balance at time of sale + VTB.



3) Offer to partner with the seller on the RTO. Seller provides house, you provide RTO expertise. Agree on a value of $320K today. You line up RTO buyer and manage through to final purchase. Split profits 50/50 with seller (RTO deposit, +cashflow, equity upside over $320K). No cash required from you.

 

[lanedry77]

Hi Robert,



There's a bunch of info missing in this situation to really answer your questions.



Things like what are the mortgage, tax, and insurance payments on the property?

What is fair market rent for the property?

How likely is it that you can find a tenant buyer that can afford $1,600/mo?



Also - what's the property worth right now? that's the biggest missing info.



But I want to give you some info, so I'm going to make some assumptions. I'll assume it's currently worth more than $320k, and the carrying costs are reasonable.



So, given that...



The way I would structure it is an AFS purchase where you have the seller change his banking info so the payments come directly out of your bank account. this eliminates the risk of you paying the seller and the seller not paying the bank. [as a side note, if the seller has $80k of unpaid equity in the deal, there's about a zero % chance that they will not pay the mortgage!].



This way, the seller is not making a proft on the deal as Thomas' number would suggest, and you're not going to be stuck with a monthly payment of $2,000. I would run away from any deal with a $2,000/mo mortgage payment as fast as my feet would carry me.



You're not 'borrowing' the $80k from the seller, but rather you're 'owing' it to him. it's a fine line difference, but it's still different.



My way of doing this would involve no interest on that $80k, and I would benefit from all mortgage paydown (since I'm the one paying it down!).



But the big warning spot on this is that he wants $20k at time of posession... that's an aweful lot, and as Thomas pointed out - it will be tough (though not impossible) to find someone that can pay you back that $20 when they move in. Considering that, is the deal worth doing?







Thanks,



David.

 

[rfk]

Hi David, Jim and Thomas,



Thanks so much for your replies. I see there are several ways to do these deals.



Jim, what is lease w/option to purchase in this context? The offer to partner with the seller is good but the seller needs the 20K.



David the way you outline the deal is the way I'd been thinking it would work and down the road I'd make the most money at cash out time. Also, in my negotiations the seller hasn't indicated that he expects interest on his equity or that he expects to benefit from the mortgage pay down. Is there a special way to write up the offer as you've outlined it?



How do I get from here to an offer I can give the seller? Should I just give a basic letter of intent to a lawyer and ask him to create one? Are there any forms that exist on the REIN download section that I could use to at least start to draft an offer? I'd appreciate any advice on how to get an offer to the seller.



All the best,

Robert

Toronto

 

[Thomas Beyer]

[quote user=rfk]Is there a special way to write up the offer as you've outlined it?


take a standard offer. On page you fill this in:



20K down .. 300K payable as follows:



$2000/month for up 36 months

remaining balance in 36 months, or earlier, at the buyer's sole, absolute and unfettered discretion !



.. then the usual conditions: property inspection ...



This way you get the mortgage paydown and he gets 0% interest on his 300K $s owing. He may not accept it: but you can ask ! he may say "yes" !!

 

[lanedry77]

Robert,



give me a call at my office (403-228-6500) and I'll walk you through the paperwork.





Thanks,



David.

 

[rfk]

Hello Thomas and David,



Thanks so much for the help!



All the best,

Robert