RTO on a TLC?

[jackie]

We listed a house for sale (single family residential) which was recently vacated by less-than-stellar tenants. The house needs some work (deep cleaning, painting and cosmetic repairs). There`s a family interested in taking the house as a rent-to-own and they are willing to do the work themselves in return for a lower pre-determined purchase price. Looking at a 3-year term for the RTO.

They would take possession of the house 1 month before moving in in order to complete the work. They`d be able to paint/repair it to suit their style and tastes and they would be responsible for the work and material costs.

Has anyone done an RTO with the house being in a "TLC" state? Any pitfalls I should watch out for? Any advice on how to determine the future purchase price under these conditions? Anything I`m missing?

Thanks in advance!
Jackie

 

[Luke_Frerichs]

Hi Jackie

Stay in control, if they say they will be making the needed repairs, be sure in the LTO/Lease contract that you specify what Repairs they will be responsible for and set deadlines for them to complete and then observe their work.. If they don`t stay true to the contract and give you nothing but excuses and screw you around. Relax, your house just got renovated for free and you hopefully have a chunk of cash in your jeans. Get as much of a down-payment from them as you can.. If they are entering into a buying arrangement with you they should be giving you "cash" at least 5 to 10%. What`s holding them back from making a mess of the renovations and splitting.. You might be better just to do a typical rent in some cases and keep the appreciation for yourself..

cheers
Luke

 

[terri]

QUOTE (jackie @ Aug 22 2010, 11:13 AM) We listed a house for sale (single family residential) which was recently vacated by less-than-stellar tenants. The house needs some work (deep cleaning, painting and cosmetic repairs). There`s a family interested in taking the house as a rent-to-own and they are willing to do the work themselves in return for a lower pre-determined purchase price. Looking at a 3-year term for the RTO.

They would take possession of the house 1 month before moving in in order to complete the work. They`d be able to paint/repair it to suit their style and tastes and they would be responsible for the work and material costs.

Has anyone done an RTO with the house being in a "TLC" state? Any pitfalls I should watch out for? Any advice on how to determine the future purchase price under these conditions? Anything I`m missing?

Thanks in advance!
Jackie

How were you planning on structuring the deal with regards to selling? x% increase in value per year? or market appraisal upon selling? If you are going the predetermined % per year increase, then you could just base the future sale price on the current value in it`s current state. If you are going the other route: fair market value appraisal upon sale, then you could get an appraisal once the renovations are finished and see what value they added and deduct that from the sale price in future.

I think that either way, you should get a post renovation appraisal to determine the value that they`ve put into the property. As well, make sure there is something in the agreement that discusses what is to happen if they are not able to purchase the property. Do they lose their d.payment and all the money they spent upgrading and improving? Are they compensated for the cost of renos but not their time?

 

[kboughen]

Determining a fair entry price is pretty straight forward by obtaining a third party appraisal, if the appraiser has a list of work that will be done, they can provide a value based on the work being done.

A pre-determined exit price in 3 years is more of an art than a science and very specific to the property and neighborhood. The goldmine score card can give you an indication of future performance and a good Realtor with local experience can show you the historical performance of similar assets and provide their opinion of future performance.

Here are some key items that will determine the success of any RTO;

• Will the Applicants income/debt ratios qualify for the exit mortgage
• Will the Applicants credit history and score qualify for the exit mortgage
• Does the Applicants current income/debt allow them to afford your rent and monthly credit payments
• Can the Applicant provide a high enough initial deposit to keep them vested in the transaction during the Term and cover your losses if they leave before the Term ends

Mark Loeffler’s Rent To Own book does a good job explaining how to structure this type of transaction; http://www.amazon.ca/Investing-Rent-Own-Pr...s/dp/047073759X

 

[jseib]

If the repairs are mostly cosmetic then the question I have to ask is why not do the repairs yourself? Frankly tenants rarely do things the way I would want them to be done and if you credit them for doing professional work and end up receiving sub par quality then it`s a problem.

I wouldn`t credit them for the work, I would base the appreciation based on what its current value would be and appreciate it like any other deal. This is fairer to the client and gives them more incentive to close as they have equity built up. Then if they do the work great! If they don`t then its not a big deal. Or do the work myself and run the deal with the numbers starting at the new price position.

 

[jackie]

Thank you, everyone, for your input! Much appreciated!
Jackie