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RTO Question....... well kinda of a RTO

Colin Forrest

Investing with Integrity
Registered
Joined
Aug 27, 2012
Messages
76
Hi resident RTO experts,

I have a question that I am hoping you can lend your expertise to. I have a rather unique situation where my long-term tenant (4 years and counting) would like to purchase our home. We’ve had preliminary discussions on the subject and it appears that the concept of RTO is of interest to them. I should stress that this is not a conventional RTO situation. They have agreed to the price but need a ‘bit’ more time to organize the financing - we are unsure how long this means but I suspect somewhere between 6 months to a year. What makes this circumstance unique is that fact that they have a large option deposit they are prepared to make ($35,000) but have asked us if we would consider applying a portion of the rent they are currently paying (which is slightly higher than the market anyway) towards their deposit if they purchase. My wife and I are very fond of this family and would like to help them purchase our home (yes it’s time to say good-bye) and feel that we are in a position to offer them this but we are unsure as to how much is fair. They have also asked us if they could undertake some renovations on the home during the time they are waiting for their finances to be sorted. This suggests to us that they are serious about moving forward with the purchase at some point. Nevertheless, it does make us a little uneasy.

Our initial position is that we will offer them a 12 month period to organize their finances to conclude the purchase. If they purchase the home, then the $35000 which is held in trust will be refunded or applied to the purchase) once the sale of the home is complete along with the rental portion we’ve calculated. If they don’t go ahead with the Lease Option then we will keep the $35,000 and the rental portion is not applied or refunded. As far as the renovations are concerned, we haven’t said yes or no, but our feeling is that as long as it’s an improvement to the property then yes, we will approve it but it’s at their cost.

I would appreciate any feedback you have and more importantly any flaws with our thinking you see.
 

Thomas Beyer

0
REIN Member
Joined
Aug 30, 2007
Messages
13,881
So, what is holding you back to write an RTO contract ?

Go for it.

Lead.

Present them with a offer incorporating these points .. And after some refinements they will likely sign it.

Who is holding it up ?
 

Sherilynn

Real Estate Maven
REIN Member
Joined
Oct 22, 2007
Messages
2,803
First and foremost, are you interested in selling? Don't sell a quality cashflowing asset simply because a tenant wants to buy it. Only sell if you think your capital could be put to better use elsewhere.

If you proceed with the RTO:
  • If you aren't sure how to analyze their financial/credit situation, have them meet with a mortgage specialist whom you trust and have them authorize the mortgage specialist to discuss details with you. Then you can decide if you want to offer them the option.
  • Renovations are fine as long as the cost is either built in to the final price or paid by the tenants.
  • Establish a final price (within the agreed term of the option) now as it will need to be written in to the option agreement. Banks don't like options stating they will sell for appraised value at time of sale.
  • The $35k option is not held in trust. It is a payment towards sale proceeds rather than a security or purchase deposit.
  • Also, it is not refunded at purchase but is applied to the down payment.
  • Any rent above market rent can be applied to the option payments if you wish. These would show as "additional purchase deposits" on the purchase agreement. Must be paid by separate cheque or transfer for proof of down payment.
Warning: it is not always easy to transition tenants to tenant-buyers. Not every tenant can make the switch to a buyer mentality (where he must treat the property as if he owns it and is responsible for repairs, etc.).

Also, because they are long term tenants, it may pose a challenge to collect a $35k option payment and then keep it if they don't buy the property within one year. Remember, it is your responsibility to set up a tenant buyer for success, and that will be even more critical since they have already been your long-term tenants. The courts could view you as predatory if they don't buy and you keep their money, regardless of the reason.
 

GaryW

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Registered
Joined
Mar 31, 2009
Messages
149
Where is your market? Is $35000.00 a lot or just enough? I'll assume it's a lot and that you are not in downtown Vancouver/Toronto. The purchase price would also help to determine the above.
Example:
If they give you $35000.00 and your purchase price is $450,000.00, then obviously 5% is $22,500.00, assuming your due diligence is correct and they won't need a 10% down payment, then in a sense, you've already collected monthly option money, $12,500 extra up front. In saying that, and the above scenario is your case, you won't need monthly option payments, which makes life much easier when they qualify to buy. Are they saving up for the closing costs, or is it included in the extra $12,500.00? To your question, (I'll assume the rent portion they are asking for and what you are agreeing to, will be lowering to market rent) yes you could apply it to the purchase price or lower the rent and ask them to save it on their own. Many options and that was just one. If you can avoid monthly option payments, then I personally would.

Renovations - As you know, every aspect of this needs to be agreed upon by you and them, as you could end up with this property, should they default. I was left with a green bedroom and a blue closet with black marks indicating each of their 3 kids heights...lol. Are renovations a part of your business model or is this your first? If the reno is a success, and the property value has increased, has this new equity(After Repaired Value) been calculated into your purchase price? Just responding to your uneasy feeling.
 

Colin Forrest

Investing with Integrity
Registered
Joined
Aug 27, 2012
Messages
76
So, what is holding you back to write an RTO contract ?

Go for it.

Lead.

Present them with a offer incorporating these points .. And after some refinements they will likely sign it.

Who is holding it up ?
Thank you Thomas, I took your advise and drafted up an agreement using the templates that REIN provided and submitted it to them for comment. I am still haven't received a response but I do expect one shortly. My hesitation was based on my lack of experience in this area, nevertheless, you were entirely correct in saying that I must 'lead' the discussion.
 

Colin Forrest

Investing with Integrity
Registered
Joined
Aug 27, 2012
Messages
76
First and foremost, are you interested in selling? Don't sell a quality cashflowing asset simply because a tenant wants to buy it. Only sell if you think your capital could be put to better use elsewhere.

If you proceed with the RTO:
  • If you aren't sure how to analyze their financial/credit situation, have them meet with a mortgage specialist whom you trust and have them authorize the mortgage specialist to discuss details with you. Then you can decide if you want to offer them the option.
  • Renovations are fine as long as the cost is either built in to the final price or paid by the tenants.
  • Establish a final price (within the agreed term of the option) now as it will need to be written in to the option agreement. Banks don't like options stating they will sell for appraised value at time of sale.
  • The $35k option is not held in trust. It is a payment towards sale proceeds rather than a security or purchase deposit.
  • Also, it is not refunded at purchase but is applied to the down payment.
  • Any rent above market rent can be applied to the option payments if you wish. These would show as "additional purchase deposits" on the purchase agreement. Must be paid by separate cheque or transfer for proof of down payment.
Warning: it is not always easy to transition tenants to tenant-buyers. Not every tenant can make the switch to a buyer mentality (where he must treat the property as if he owns it and is responsible for repairs, etc.).

Also, because they are long term tenants, it may pose a challenge to collect a $35k option payment and then keep it if they don't buy the property within one year. Remember, it is your responsibility to set up a tenant buyer for success, and that will be even more critical since they have already been your long-term tenants. The courts could view you as predatory if they don't buy and you keep their money, regardless of the reason.
Thank you Sherilynn for providing me with some great points to consider. I am not too concerned about this family switching to a buyer's mentality as they were home owners in the past. Unfortunately circumstances required them to become tenants for longer than they intended. My wife and I have made it clear to them that we won't enter any agreement with them that doesn't guarantee a successful outcome for both of parties.
 

Colin Forrest

Investing with Integrity
Registered
Joined
Aug 27, 2012
Messages
76
Where is your market? Is $35000.00 a lot or just enough? I'll assume it's a lot and that you are not in downtown Vancouver/Toronto. The purchase price would also help to determine the above.
Example:
If they give you $35000.00 and your purchase price is $450,000.00, then obviously 5% is $22,500.00, assuming your due diligence is correct and they won't need a 10% down payment, then in a sense, you've already collected monthly option money, $12,500 extra up front. In saying that, and the above scenario is your case, you won't need monthly option payments, which makes life much easier when they qualify to buy. Are they saving up for the closing costs, or is it included in the extra $12,500.00? To your question, (I'll assume the rent portion they are asking for and what you are agreeing to, will be lowering to market rent) yes you could apply it to the purchase price or lower the rent and ask them to save it on their own. Many options and that was just one. If you can avoid monthly option payments, then I personally would.

Renovations - As you know, every aspect of this needs to be agreed upon by you and them, as you could end up with this property, should they default. I was left with a green bedroom and a blue closet with black marks indicating each of their 3 kids heights...lol. Are renovations a part of your business model or is this your first? If the reno is a success, and the property value has increased, has this new equity(After Repaired Value) been calculated into your purchase price? Just responding to your uneasy feeling.

Thank you Gary for you feedback, it is much appreciated. The property is located in an area where there hasn't been much capital appreciation but very good cash flow. With a large deposit already available and obviously with money to spend on renovations (upgrade the kitchen which really doesn't need it in our opinion: it has african granite counter-tops, soft close drawers, etc.) we have asked them why they don't purchase the home right now and save their renovation money for a later time. To this they responded that they really want to feel like it's their home and that they are trying to arrange financing but have found it difficult. I have given them the name of my mortgage broker who is an expert in RTO's and a first class individual but so far they haven't called. The ball is in their court right now.
 
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