Possible opportunity for me - please share your thoughts

[dwoychuk]

Hi Everyone,

I have run into a possible opportunity, but I`m not sure it can work the way I would need it to.

Basically what the situation is, a co-worker of mine has to sell his place because they cannot afford their house anymore (mother and wife have lost their jobs). They are planning on selling and moving into an apartment.

I have been looking into some of the RTO side of REI and thought this might be an opportunity for them to keep their place, and for me to get a start in REI. What I thought of was, if there was some way for them to keep the house (1/2 duplex) in their name and basically flip this over from a owner occupied to an RTO home.

So what my pitch to him was, they stay holding the mortgage, I would do everything else in terms of getting any documents written up, finding an RTO tenant, etc. and then we would split any profit from the agreement date forward (I say this because they already have some equity built up in the place that is rightfully theirs).

With that being said, I guess I basically have 2 key questions right now.

1) Can this be done with his mortgage, or would he have to re-finance and be subject to a higher down payment because it isn`t going to be owner occupied?

2) Does it sound like a good split (for both parties) in terms a JV partnership?


Any input would be greatly appreciated.

Thanks in advance!

 

[Thomas Beyer]

QUOTE (dwoychuk @ Mar 13 2010, 10:44 AM)
..



1) Can this be done with his mortgage, or would he have to re-finance and be subject to a higher down payment because it isn't going to be owner occupied?



2) Does it sound like a good split (for both parties) in terms a JV partnership?


yes that can be done .. assuming

a) they stay on title,

b) they move out,

c) you have a solid agreement in place

d) you find a great RTO tenant-buyer

e) you know what you are doing (do you, btw ??)

f) you can agree on a current house value and a future house value that is reasonable for the current owner and teh future tenant-buyer



i.e. the risk is ON THEM .. not you .. i.e. if you screw up they loose and you lose nothing (but your friendship perhaps).



In light of that I'd say: 70% to them, 30% to you .. or you give them some money and do 50/50.

 

[dwoychuk]

Hi Thomas,

Thanks for the reply.

First off, to answer "e", I am learning what to do. I don`t have any properties yet except for my PR. I have been doing as much reading as I can and I`m currently reading Mark Loeffler`s book on Investing in RTO`s.

As for the other points, I figured that if this was possible that they would have to stay on title and in my brief discussion with him I told him that would probably be the case. They were planning on selling and moving into a rental apartment anyway so I told him that would definately have to be part of plan. C, D and F are the ones I am working on figuring out. If I was able to put some sort of a deal together with them, I want to make sure it is fair. As you said, they are the ones that have all the risk on this one so I want to make sure it worthwhile for them especially.

Unfortunately I cannot put any money into the deal because I don`t have any. My wife and I own our PR, but we don`t have any equity in it as it was a high ratio mortgage and we bought right before the market dropped. This is my first road block and I am trying to find opportunities to work around it.

Thanks again for your input, if you have any other suggestions or people I could contact in regards to these types of agreements it would be greatly appreciated.

 

[Thomas Beyer]

QUOTE (dwoychuk @ Mar 14 2010, 01:27 AM)
.. First off, to answer "e", I am learning what to do. I don't have any properties yet except for my PR.

...



I want to make sure it is fair. ..




Rent-to-Own (RTO) is a great way to sell a house in the future and collect great cash-flow until that point. Its a great theory mastered in real life by very few !!



Her's what has to be done



Step 1: find out what house is worth if sold today

Step 2: work with your friend and decide what is "fair" .. maybe 50/50 is fair .. in general "fair" is what both parties agree to without undue pressure

Step 3: have a competent lawyer or knowledge so you have TWO contracts

a) a purchase option contract, and

b) a lease without a lease-to-own option in it as court might throw that lease out if you have to evict due to damage or non-payment

Step 4: run an ad in paper to find potential tenant buyer (TB)

Step 5: decide on a TB, after hearing his story, checking his credit and meeting him / her in person

Step 6: have papers signed and his sizable deposit collected

Step 7: friend moves out and new tenant moves in



The biggest risk of RTO is defaulting on payments by tenant-buyer + associated damage. Thus, his initial deposit must be big enough to cover 4-5 months of mortgage payments and damage fix up .. so 15 to 20K minimum. Don't fool yourself that a 5K deposit will cover it .. it may go well for 2-3 months .. then the problem will start in many cases.



The trick then is to find a person that has that kind of cash and doesn't qualify for a mortgage yet, i.e. a person that does not want to buy yet or can't buy yet. This is usually either

a) a recent immigrant (best group probably !!!), or

b) a drug dealer with lots of cash dealings but undeclared income, or

c) a recent bankrupt person with cash from an unknown source, or

d) a confused person



So, RTO is easy in principal and hard to execute .. but there are some folks at REIN or here at myreinspace that have done many RTO deals so chat to them.

 

[dwoychuk]

Thanks again Thomas, your posts are always very helpful.

I hope use RTO as a paired invenstment strategy along with rentals. This particular case, I just don`t think there is any way for me to make it work as a rental property so that is why I decided to look at the RTO route for this place.

Anyone with RTO experience? Any suggestions would be appreciated.

 

[markl]

Hi Dan,

Would your friend lose by selling it today?

If not perhaps a solution for them may be to market the property for sale while you market the property as a RTO therefore they are not waiting if you cannot find the ideal tenant in time and you are giving them multiple options.

It sounds like you want to go the JV route with them but the other option is to do a sandwich lease option with them essentially the same basic principals of a JV except you would pay a fixed cost per month. You would get a higher amount from your tenant and pocket the difference. You would also pre-determine an exit price.

What is the value of the home (Is it a home a first time home buyer would buy)? Where is it? (Is it located in a bigger city - active resale market) What is the average gross household income of the vicinity(will your buyer be able to get a mortgage at the end of the day)?

Regards,

 

[dwoychuk]

Hi Mark,

Just the guy I was hoping would respond! (Reading your book right now).

Because of the amount of risk that would fall on their shoulders (as Thomas brought to light), and also because of the timeline (which has shrunk now) I told him that he would probably be best off to list and sell. I don`t want to rush the process and put in the wrong tenant-buyer and screw it up. Though you do make a great point of giving them multiple options, I will let him know, if he would like I can keep working on this idea.

QUOTE Would your friend lose by selling it today?
No, if they are able to sell what the realtor is suggesting they would walk away with around 20k

QUOTE What is the value of the home (Is it a home a first time home buyer would buy)? Where is it? (Is it located in a bigger city - active resale market) What is the average gross household income of the vicinity(will your buyer be able to get a mortgage at the end of the day)?
The duplex is located in Calgary NW- Ranchlands area. Location wise, Ranchlands is quite good, close to Crowfoot Shopping Center which has a number of restaurants, grocery stores and retail outlets including big boxes like Rona and Chapters. Transportation wise, it is close to Crowchild Trail and the new Crowfoot LRT station. Speaking initially with his realator they were told the home is worth 340k-350k, which seems to be on par with the market (Feb stats show 8 homes sold for an average of 337k).

I haven`t been able to pull any data on the household incomes though, I`m not really sure where to look for that.

QUOTE It sounds like you want to go the JV route with them but the other option is to do a sandwich lease option with them essentially the same basic principals of a JV except you would pay a fixed cost per month. You would get a higher amount from your tenant and pocket the difference. You would also pre-determine an exit price.
Would you be able elaborate on this? I have heard of the sandwich leases before, but I`m not entirely clear on how they work. Is it essentially an owner financed deal? Do you run into any mortgage concerns since they purchased as their PR?

Thanks,

 

[Cargren]

QUOTE (dwoychuk @ Mar 16 2010, 06:22 AM)
Do you run into any mortgage concerns since they purchased as their PR?



Thanks,




Hi Dan,



Any mortgage broker on here can correct me if I'm wrong, but there should be no problem regarding the PR becoming a rental unit, and would most likely not be an issue with the bank. Circimstances change in peoples lives. It is definitely fraud when a person states to the lender that they are buying as PR when their intention is to rent out. That could get them into trouble.



In your case it sounds like they lived in it (and intended to do so long term), then their financial situation changed and could no longer afford to remain. I am fairly certain they would have no mortgage fraud concerns whatsoever.



Rob