Selling a property via AFS or LTO - Pro`s and Cons of both??

[MonteDobson]

Hello all,



I have a property in Stony Plain, AB that we plan to sell over the next while and are evaluating a few different strategies, mainly AFS (Agreement for Sale) and LTO (Lease to Own).



Can some of the more experienced quick turn folks please help me extrapolate the pro's and cons for selling a property by either one of these methods.



Some property details:

Current property value: $360,000-370,000

Monthly mortgage payments: ~$1100/month interest only LOC mortgage @ prime +1%

Monthly Taxes and Insurance: ~$300/month



At first glance, it appears that an AFS offers more security and protection in case of a default but I haven't evaluated all of the angles quite yet.



You thoughts, comments and suggestions are greatly appreciated.

 

[Dan_Eisenhauer]

As you point out, Monte, an AFS is a firm contract, and provided the buyer meets all the terms of that contract, your property is sold. You have the right to sue if the buyer defaults.



An RTO is nothing more than an Option To Purchase, with the key word be OPTION. The buyer can walk with almost no repercussions. They are under no obligation to complete the purchase. And, some TBs have sued the seller to get all their monies back. The wording of an RTO agreement is very important because some judges do award full restitution when they do not see the agreement as an option.



Financially, they are almost identical. The buyer pays you a "premium" which goes to the purchase price of the property.

 

[ChrisDavies]

Hi Monte, just curious if or why a normal sale (either via a Realtor or selling yourself).

 

[MonteDobson]

Thanks guys for the responses.



Chris, the comps we received came in lower than what we would like to get out of this property, so AFS or RTO exit strategies would allow us to extract a higher selling price out of this
property by speculating on the value in 2-4 yrs time. Also, Realtor fees/closing costs would be $15-20,000 on this property and that would chew into a good chunk of profit by selling into today's market.

 

[AndreaW]

I would sell it via agreement for sale hands down but not knowing how much you owe on mortgage, I would recommend getting as much cash to mortgage balance as you can. You may not get all of it but strive to get as much as you can to ensure the buyer will follow through.



I would recommend sending them to your mortgage broker to determine if they will be able to get their own financing before your mortgage renewal date comes up, or whatever your closing date is on the contract. This ensures that they are a qualified buyer. (These are things that I don't provide sellers by the way, but then I don't buy like I sell either.)

 

[neill]

We certainly like to buy via AFS, however I am not sure that we would sell via AFS without first checking to see what happens in the case of a default.



If the transaction is treated the same as default on a conventional mortgage (and I suspect but do not know 100% that it is), then you may want to be aware how long it would take from start to finish on the foreclosure process (and therefore how long folks in default would be able to be squatters in your property at 0 pmt while you still have mortgage obligations....). Count on a mimimum of six months, and upwards of a year.



When Ron LeGrand was in town promoting Seller Financing, one of the main differences that came up between AB and most states is the length of time for the foreclosure process here definitely poses a larger risk to your cash-flow.



For this reason alone, Lynda and I personally would sell all day long via LTO vs. Seller finance - we converted one of our own buy and hold properties to LTO this past summer.



Does AFS differ from seller finance? Worth checking out as part of your due dligence for sure, IMO





Cheers

Neill

 

[markl]

Like all things the answer is it depends.



Both are different instruments obviously where the AFS sets the price today for sale at some point in the future. A rent to own offers a more limited time frame for the completion to be made.



I have done both. It really depended what I wanted out of the property and what made sense from an advertising perspective.



Regards,

 

[markl]

My other question is why does an AFS offer more security? If you need to evict a tenant how long does it take? If they are in default they are in default you can start action on them immediately.



The Lease has nothing to do with the option agreement.