Owner as Tenant

[FBC]

Good morning everyone....
I`m a new investor and I`ve read quite a bit on this forum (all good info), but I`m not sure if this has been discussed before (if it has, could you please direct me to it?).

The Issue

I`m in the process of closing on a property where the owner has expressed interest in staying as a tenant. I`m of the opinion that this is a nice solution to finding tenants.

However, I`m concerned that knowing the owner has had recent financial difficulties (late on maintenance fee, and probably mortgage payment - which is probably why they sold), if a problem occurs I would be the last to get paid.

Given a conversation with the owner, once the prop is sold, most of the debt will disappear, and based on their income (which I have not verified yet), they said they would be OK. They also mentioned that because they like the area, they would like to stay indefinitely (which would be nice to have).

We are planning to go through a formal rental application, and give them the opportunity to explain whatever is there that negatively affects them.

Given the above, has anybody gone through something similar? What advise can you give us? Would there be something we left out that we should consider? Are we over-thinking this, and allow the owner to stay or ask them to please find another property?

All comments would be GREATLY appreciated.

Thanks.

 

[ShannonMurree]

QUOTE (FBC @ Sep 23 2010, 12:04 PM) Good morning everyone....
I`m a new investor and I`ve read quite a bit on this forum (all good info), but I`m not sure if this has been discussed before (if it has, could you please direct me to it?).

The Issue

I`m in the process of closing on a property where the owner has expressed interest in staying as a tenant. I`m of the opinion that this is a nice solution to finding tenants.

However, I`m concerned that knowing the owner has had recent financial difficulties (late on maintenance fee, and probably mortgage payment - which is probably why they sold), if a problem occurs I would be the last to get paid.

Given a conversation with the owner, once the prop is sold, most of the debt will disappear, and based on their income (which I have not verified yet), they said they would be OK. They also mentioned that because they like the area, they would like to stay indefinitely (which would be nice to have).

We are planning to go through a formal rental application, and give them the opportunity to explain whatever is there that negatively affects them.

Given the above, has anybody gone through something similar? What advise can you give us? Would there be something we left out that we should consider? Are we over-thinking this, and allow the owner to stay or ask them to please find another property?

All comments would be GREATLY appreciated.

Thanks.


Good morning,
There are pro`s and con`s. I will respond but before I do, is this property in Ontario (some answers are based on this response)

 

[FBC]

QUOTE (ShannonMurree @ Sep 23 2010, 12:20 PM) Good morning,
There are pro`s and con`s. I will respond but before I do, is this property in Ontario (some answers are based on this response)

Hello....

Yes it is.

Thanks.

 

[ShannonMurree]

Hi there
Yes, your obvious concerns are the fact that he had a mortgage and couldn`t keep up with that. Why? How much was his mortgage payment and why couldn`t he keep up? How much is your market rent going to be? You`re offering a great alternative and solution but the fact that he`s the owner of the house does call for some concern. What does your lawyer say? You should definitely disclose this to him/her as well so they can help put some parameters in place to assist you. Make sure your lease contract is rock solid and laid out in full details of what expectations and responsibilities are so there is no room for error or interpretation. Most especially with Ontario Law and how the Landlord and Tenant Board is so one-sided and most favourably for tenants.

I would be most concerned on the financial end of things because if they defaulted on a mortgage they`re most certainly not going to care about you or the rent....especially if there`s some sentiment in this home.

Who knows? Maybe the maintenance costs were getting to him and he couldn`t keep up? However, if he`s had financial issues once and not good with managing his money, regardless whether things "get paid off" or not, the fact he will still have those expenses (and access to credit card limit) and rack them all up all over again....only this time you`re left holding the bag on holding the mortgage. If you do a lease, well you`re stuck with him for the term of that lease unless you have him do month-to month. This way if he defaults you can serve the notices to get him out earlier than being stuck with him for the year.

 

[invst4profit]

Month to month or on a lease if a tenant defaults it still takes the same length of time to evict and is nearly impossible either way.
As far as language in your lease is concerned the LTB will only address issues included in the RTA. Adding extra language to a lease agreement is good if the tenant abides by the language but is not enforceable if they chose to ignore the contract if it is not permitted (specified) in the RTA.

There are two downsides to taking on a previous owner as a tenant, first they may still consider the place to be theirs making them uncooperative to your ways of doing things. Second in Ontario due to rent controls long term tenants, which this one indicates is there intention, are very hard on the pocket book. Annual allowable increases do not keep pace with the cost of living making it necessary to roll over tenants every 2-3 years or so to keep rental rates current.

It is my guess if he could not make mortgage payments managing money is an issue for him and he will likely end up defaulting on his rent. If it were me I would set the rent very high to discourage him from remaining. If he really wants to stay he will pay the premium until the inevitable default.

 

[JimWhitelaw]

No direct experience with this, but I`d be pretty cautious about renting back to them. That`s probably be like backup plan C if I thought it would be really hard to rent out to someone else.

 

[Thomas Beyer]

QUOTE (FBC @ Sep 23 2010, 09:04 AM) .. What advise can you give us? ..
Attach lease to offer-to-purchase and make offer subject to him signing lease, including him providing the usual one month security deposit as part of the cash-to-close!

 

[ShannonMurree]

QUOTE (invst4profit @ Sep 23 2010, 07:42 PM) Month to month or on a lease if a tenant defaults it still takes the same length of time to evict and is nearly impossible either way.
.

No. If a year lease or fixed term, you can be stuck with that tenant regardless whether they pay or not until the end of their term according to RTA. Yes, either way a pain to evict but much "easier" if month-to-month.

I would suggest doing a month to month lease and say to him if he`s successful for at least six months then you`d reconsider signing longer. It`s a risk and could go either way. Just ensure to do your diligence and then most importantly, go with your gut instinct and don`t ignore that.

 

[FBC]

QUOTE (ShannonMurree @ Sep 24 2010, 12:07 AM) No. If a year lease or fixed term, you can be stuck with that tenant regardless whether they pay or not until the end of their term according to RTA. Yes, either way a pain to evict but much "easier" if month-to-month.

I would suggest doing a month to month lease and say to him if he`s successful for at least six months then you`d reconsider signing longer. It`s a risk and could go either way. Just ensure to do your diligence and then most importantly, go with your gut instinct and don`t ignore that.

Thanks for all the comments. Would it make any difference if I tell you that the debt was caused not by irresponsible credit card spending (an assumption on my part so far), but by death in the family?

 

[GarthChapman]

This can work well, but there are risks. One that they have diffficulty reconciliing their loss of ownership of the home and end up being a lousy tenant because of that (like continuing to live with a spouse after they divorced you).

The second risk is that the bank loses a lousy customer and you gain one. So, how does your deal make it easier for them to be successfulk than the one they are in now.

The third is if they ever decide to take you to Court for taking advantage of them in their hour of darkness by purchasing their home for a very low price and then renting back to them, a Judge may well see you as having taken advantage of your superior knowledge and fincial capacity to dupe them out of their property, and thereby unwind your deal and give the property back to the original owner. This has happened, not often, but it has happened. So be ESPECIALLY careful to demand and require proof that they have had independant advice from a lawyer, and not a lawyer referred to them by you, not even from a list of 5 lawyers you gave them to choose from.

Hope that helps,

 

[WadeFenner]

QUOTE (FBC @ Sep 23 2010, 10:04 AM) Good morning everyone....
I`m a new investor and I`ve read quite a bit on this forum (all good info), but I`m not sure if this has been discussed before (if it has, could you please direct me to it?).

The Issue

I`m in the process of closing on a property where the owner has expressed interest in staying as a tenant. I`m of the opinion that this is a nice solution to finding tenants.

However, I`m concerned that knowing the owner has had recent financial difficulties (late on maintenance fee, and probably mortgage payment - which is probably why they sold), if a problem occurs I would be the last to get paid.

Given a conversation with the owner, once the prop is sold, most of the debt will disappear, and based on their income (which I have not verified yet), they said they would be OK. They also mentioned that because they like the area, they would like to stay indefinitely (which would be nice to have).

We are planning to go through a formal rental application, and give them the opportunity to explain whatever is there that negatively affects them.

Given the above, has anybody gone through something similar? What advise can you give us? Would there be something we left out that we should consider? Are we over-thinking this, and allow the owner to stay or ask them to please find another property?

All comments would be GREATLY appreciated.

Thanks.


Hello,

FIRST OFF: I AM NOT A MORTGAGE BROKER, LAWYER, OR AN ACCOUNTANT.

I AM SPEAKING FROM MY OWN EXPERIENCE AND THAT IS ALL.

PROCEED CAREFULLY

Many speakers such as Ron LeGrand recomend you do not do this type of deal but I have done so on many occasions with success.

The problem, as I see it, is if you are getting the property at a ridiculously low purchase price and/or trying to rent the property back to the seller at a superinflated rate. By doing so you may create some anomosity with the seller and they may decide to seek revenge at a later date. If the deal is "fair" then you stand a better chance of having it all go well or you not getting slapped if it ever does wind up in court. Documentation with clarity of detail is critical for a better understanding between both parties and for your protection.

I like to have a maximum amount of security for this type of deal because yes in some cases my seller had an existing history of non-payment or financial issues of some sort.

You cannot take a 6 or 12 month term of rent out of the sale proceeds (ie hold money back from the sale) because the seller/tenant could complain that you made them pre-pay the rent which in Alberta is not allowed BUT you can reduce the purchase price by the amount of the the rent for the full term of the lease agreement. Then rent them the property with a lease at very low or no monthly payment. (Discuss this with your accountant to see how it affects you & your mortgage broker because there are certain ramifications for completing the deal in this manner).

You still want to have a lease document filled out to have a legal "Occupancy Agreement" in place with all of the standard lease details (Yes use a lease standard for your area). Make it clear that it is a fixed term lease and you have no obligation to re-rent the property to them at the end of the fixed term.

Good Luck,

Wade

 

[Berubeland]

In Ontario, it makes absolutely no difference to the eviction process, what kind of lease there is. Term leases make no difference.

The only difference is if you want to evict for continual late payment you can only do this at the end of the lease. Most people don`t use this application anyways because of the way the Board works it usually takes 2 attempts before success using this form.

If people don`t pay their rent, process is identical for one year or month to month leases. N-4 then L-1 then hearing date and possible eviction.

 

[terri]

I like Thomas`s suggestion of lease to offer to purchase. If they are losing the house because of debt caused by a death in the family and they like the house and neighbourhood enough to want to continue living there, then I think it`s good Karma to give them the opportunity to buy it back in future. They`ve already suffered loss and now they are losing their home too.

Of course what everyone else is saying is very important, as well. make sure they can pay their rent, which it sounds like you believe they can. Make sure there is no resentment on their part or they will not pay or not take care of the property. I don`t know what your long term goals are for this property or how long you intended to own it, but a rent to own could be a win/win for both you and the seller.

 

[FBC]

QUOTE (terri @ Sep 24 2010, 08:56 PM) I like Thomas`s suggestion of lease to offer to purchase. If they are losing the house because of debt caused by a death in the family and they like the house and neighbourhood enough to want to continue living there, then I think it`s good Karma to give them the opportunity to buy it back in future. They`ve already suffered loss and now they are losing their home too.

Of course what everyone else is saying is very important, as well. make sure they can pay their rent, which it sounds like you believe they can. Make sure there is no resentment on their part or they will not pay or not take care of the property. I don`t know what your long term goals are for this property or how long you intended to own it, but a rent to own could be a win/win for both you and the seller.


Thank you all for your advise. We`ll see what happens in the weeks to come. I`ll keep monitoring this thread in case other comments pop up.
Thanks again.

 

[ShannonMurree]

QUOTE (FBC @ Sep 24 2010, 09:02 AM) Thanks for all the comments. Would it make any difference if I tell you that the debt was caused not by irresponsible credit card spending (an assumption on my part so far), but by death in the family?

Totally. I have a person we helped in that situation because his wife passed away and he tried to carry on her memory by running her business. He had since re-married and just wanted a fresh start. Bankruptcty was his only option. One of my best tenants. Sometimes people do have to re-build and life happens. He could very well turn around and be a great tenant and be very grateful for the opportunity that you`re providing. Who knows? Perhaps he could put his situation behind him and ask for rent-to-own or buy the house from you again. Never know. As long as you do your due diligence, perhaps it should work out fine.

Much success in whatever you do with this situation.