Rent to Own and CMHC

[RandyBett]

Hi there looking for some input from other investors who are using the RTO strategy.

Based on a conversation yesterday (with a Calgary Mortgage Broker and a Former President of the Alberta Mortgage Brokers Association) and a review of CMHC`s applied policy/rules it appears that the upfront option fee/monthly option credits must be 100% refundable for a lease option/rent to own.

As well the upfront option fee/monthly option credits cannot be applied to the down payment.

Given these two scenarios how are you handling the down payment at the end of the term as the option monies cannot be applied to the down payment only to lower the purchase price and what security does the seller/vendor have since the RTO buyer can opt out and request all of their monies back at the end of the lease option.

I`d greatly appreciate your feedback and comments.

Enjoy a great summer and see you at the REIN Bus Trip/Tour and Multi Family Workshop in Edmonton!

 

[markl]

I haven’t experienced any issues closing any RTO deals, thus far.


Since I am not the one dealing with closing the transactions I have a mortgage broker who is doing it for me. Here is his response. Please note we helped 4 tenants close last month.

I presented at our monthly DLC meeting, which included over 20 lenders in attendance and all lenders had positive things to say. The BDM from First Line mortgages explained that they would be able to consider RTO transactions provided that the deposit was fully refundable to the tenant; however, none of our contracts indicate this, therefore we just don’t use First Line.

From speaking with many other lenders, they’ve indicated their biggest concern with RTO’s is proper upfront documentation. They’ve experienced many landlords renting out their properties to tenants, and then offering them an opportunity to buy it back after a few years, without any contracts explaining the terms or conditions. As long as the contracts have been completed upfront and they’re thoroughly explained, they shouldn’t have any issue with them.

With respect to the monthly credits, CMHC and the lenders have explained only the amount above market rents will be recognized and may be applied towards the tenant’s down payment.

I hope this helps. Pretty much no hard and fast rules around this one but get yourself a good mortgage broker who understand getting the tenants qualified.

Regards,

 

[RandyBett]

Thanks for the follow up Mark.

I`ll check this out with the local brokers and CMHC.

On your paperwork are you indicating the option fee/security deposit/ or whatever your calling the upfront money-is fully refundable and does not apply to the down payment portion of the mortgage?

 

[RobMacdonald]

Hi Randy,

I`ve handles a number of lease option buyouts and haven`t had an issue with the downpayment yet. In each case, the documentation was very clear up front, and the lender used the deposit, plus the surplus lease amount, plus the interest over 3 years towards the downpayment.

I was asked to provide a letter from an appraiser to confirm the economic rent is a couple of cases.

 

[BrianPersaud]

QUOTE (RandyBett @ Jul 28 2010, 08:54 AM) Hi there looking for some input from other investors who are using the RTO strategy.

Based on a conversation yesterday (with a Calgary Mortgage Broker and a Former President of the Alberta Mortgage Brokers Association) and a review of CMHC`s applied policy/rules it appears that the upfront option fee/monthly option credits must be 100% refundable for a lease option/rent to own.

As well the upfront option fee/monthly option credits cannot be applied to the down payment.

Given these two scenarios how are you handling the down payment at the end of the term as the option monies cannot be applied to the down payment only to lower the purchase price and what security does the seller/vendor have since the RTO buyer can opt out and request all of their monies back at the end of the lease option.

I`d greatly appreciate your feedback and comments.

Enjoy a great summer and see you at the REIN Bus Trip/Tour and Multi Family Workshop in Edmonton!


Could be an issue of the client doesn`t want to close because a) the appreciate rate on the buy-back price is higher than market value (ask LTO specialists in Alberta who went through during their market crash) and b) the tenants situation changes....Tenants could sue you for the option + credits and have a strong case....as with anything, **** happens, and this is a worse case scenario.


Obviously, you can manage this risk by getting a quality tenant-buyer that is sincere about wanting to buy a home and setting the agreement up so its a smooth transaction.

 

[RandyBett]

OK thanks for the input. We use transparent documentation upfront and screen the applicants via a banker/broker and verify employment history, etc.

As Brian says ****** happens and that can be mitigated to an extent with proper due diligence.

Enjoy the long weekend.

 

[markl]

Hi Randy,

Funny we just had our first experience with a major bank rejecting the down payment. RBC said they would not recognize the initial deposit. The tenant is now working with a mortgage broker who can take them to an institution to get the deal done.

Regards,

 

[GarthChapman]

QUOTE (RandyBett @ Jul 28 2010, 05:54 AM) Based on a conversation yesterday (with a Calgary Mortgage Broker and a Former President of the Alberta Mortgage Brokers Association) and a review of CMHC`s applied policy/rules it appears that the upfront option fee/monthly option credits must be 100% refundable for a lease option/rent to own.

Randy, I checked this out a few weeks ago via our Broker/Owner, who had told me that his past experience was that CMHC required 100% of payments made against the purchase price be refundable. So he called his CMHC contact and was told that there has been a change, that CMHC has relaxed the requiredment from 100% refundable to `a reasonable amount`, but would not define what is reasonable.

So clearly investors should proceed knowing this can be an issue and decide whether to make a reasonable amount of the deposits against purchase indeed refiundable to the purchaser.

Or not. There are other insurers in the market besides CMHC. And a good mortgage broker can aften package a deal so it is acceptable to a lender. Often it comes down to presentation.

 

[JanBowler]

We would value Tony Peters` comments on this discussion as he`s done so many RTOs. Thanks.

 

[Hagen]

Randy
Good comments overall. I also spoke with an MPAC lender today and they were strict about allowing any non-refundable deposits towards downpayment. Their indication was to reveiw adn use CMHC`s online lease-to-own documentation. I searched, but was unable to find anything on the CMHC website regarding LTO docs... has anyone esle identified these CMHC forms. Are they consitent with thecurrent lease/option contacts currently in use?

 

[nubiwan]

QUOTE (RandyBett @ Jul 28 2010, 05:02 PM) Thanks for the follow up Mark.

I`ll check this out with the local brokers and CMHC.

On your paperwork are you indicating the option fee/security deposit/ or whatever your calling the upfront money-is fully refundable and does not apply to the down payment portion of the mortgage?

By fully refundable, are you suggesting if the Tenant buyer walks without exercising the option, then the owner still has to refund these credits? Surely not! Is that what CMHC is suggesting be done? I assume all RTO contracts indicate these credits be refunded only if teh option to buy is exercised. Correct?

I`d further suggest that refunding credits does not work for the investor who is primarily using equity in the home to finance these credits.

 

[nubiwan]

QUOTE (markl @ Jul 31 2010, 10:06 AM) Hi Randy,

Funny we just had our first experience with a major bank rejecting the down payment. RBC said they would not recognize the initial deposit. The tenant is now working with a mortgage broker who can take them to an institution to get the deal done.

Regards,

No offence, and perhaps a little off topic, but I have found RBC to be one of THE worst banks to deal with when trying to secure mortgages. Oddly enough, I do my day to day banking with them and carry a couple of lines of credit, and an AVION Card for the airmiles, but all this is more out of tradition (they also have the most ATM`s of any bank it has to be said). Hell, they sound pretty good. But that`s all day to day stuff, and I pay for that anyway.

In my experience however, I find they generally ask for your first born when trying to secure an actual mortgage. Very stingy. Perhaps it has just been the wrong times that I have asked them, I do not know. I wonder is there thread on this forum about the different banks and people`s general experiences.

I personally deal with Scotiabank and my rep there is excellent. She can tell me within minutes (on the phone) what my borrowing chances are. That`s the way it should be.

 

[JimWhitelaw]

nubiwan, my experience is exactly the opposite of yours, concerning those two banks. :0

I think what that really illustrates is not so much the policies of various banks, but the power of personal relationships in business. A good working relationship with a competent broker or banker on your team can get things done even when they are on the edges of what "policy" dictates must happen. "Rules are for other people."

 

[GarthChapman]

By fully refundable, CMHC takes the position that the deposit is akin to a deposit on a purchase that has not yet gone `firm` (all conditions removed). Hence their requirement that A REASONABLE PORTION of the deposit be refundable. It seems to me to be an incorrect interpretation of contract law, but who am I...

However, it`s their sandbox, and hence their rules do rule.

 

[Dan_Eisenhauer]

Playing devil`s advocate... Why would CMHC care if the deposit was fully refundable or not if the deal goes south and they have no interest in the transaction? I can see why they might be concerned if a purchaser was unable to show that 100% of the money`s they supposedly paid toward the purchase was not able to be credited to that price.

That interpretation does not make sense to my feeble mind. But, then, I am not a bureaucrat. That makes me VERY happy.

 

[homein1canada]

I was browsing around looking for some info about real estate in Edmonton and i came across this forum. Im getting a lot of great information from here. Thanks for posts guys keep it coming.