Rent to Own complications

[aspcanada]

Hi All,

I am having an issue with my Rent to Own tenants. Here is the current situation:

• Lease and Option Agreements are in both parties names.
• There has been a breakdown in the relationship.
• Agreement is on a suited house, where one is now living in the suite and the other is upstairs.
• Tenants are facing eviction due to material breach of several terms of the Lease Agreement (and the Option Agreement).
  • Rental Payments: repeated late payments
  • Alterations: Locks replaced but keys not provided to landlord
  • Pets: added cat and dog to existing 2 dogs allowed
  • Landscaping: yard and gardens in bad shape
  • Appearance: hoarding, blankets on windows, very dirty carpets
  • Conduct: domestic disturbance/violence
• I have offered the tenants two months to correct the breach (due July 30, 2015).
• Male tenant is paying all the rent, (including his option deposit), while female is living upstairs for free.
• Male has completed his portion of the clean up, however, upstairs is still a mess. Female is not cooperating as she has nothing to lose.
• Male is going through legal means to remove female from the Agreements so he can continue with the Rent to Own program.
• I've suggested that the tenants exercise their option to purchase early, rather than wait another 2 years when the option expires.
• At this point we are continuing with the eviction so that they both have to move out. Tenant will lose all rent credits and option deposit if they get evicted, per Option Agreement.
• If the male tenant executes his option, he will inherit the female tenant as per Lease Agreement.

Question:

1. Will I get in trouble, if upon eviction, by selling the house (per regular RE Purchase contract) to the male tenant for the future amount per the original option agreement ($390,000), less the option deposit and rent credits ($20,000) for a total of $370,000?
2. Will the male have to vacate the premises after eviction and prior to Completion Date?

Any help on this matter is greatly appreciated.

Regards,
-Alain (former REIN member)

 

[Sherilynn]

The answers will depend partly on the province and partly on the structure and wording of your contracts.

Regardless, you may find it difficult to evict based on those breaches. As soon as the LT or RTDRS learns there is a lease option involved, the eviction could get kicked up to Queen's Bench. While the male tenant may like to allow the eviction and then start a new option (which is possible), the female may decide to put up a fuss in order to keep her rent-free accommodations and/or get a piece of the option credits.

Trust me, you do NOT want to go to court against a crazy person.

 

[Matt Crowley]

Question:

1. Will I get in trouble, if upon eviction, by selling the house (per regular RE Purchase contract) to the male tenant for the future amount per the original option agreement ($390,000), less the option deposit and rent credits ($20,000) for a total of $370,000?
2. Will the male have to vacate the premises after eviction and prior to Completion Date?

(former REIN member)

Yikes, Alain...complicated situation.

I'm hardly an expert on these RTO deals (done only two myself), but from reading several court cases, I think that judges interpret the contracts however they feel reflects the spirit of the deal. The wording is a lot less relevant today than it used to be and principles of equity often trump principles of law.

In my opinion, you have a duty to both of them and it is not your moral or legal right to cut one person out. They are both on the contract and represent two people of one common party. This party deserves the same treatment before the law. If they should be evicted, evict the party. If there is potential to restore the relationship to an amicable state where everybody gets less than they want but no one is destitute, that may be the best you can do here.

Personally, I think you are getting into a hairy situation when you are talking about cutting one person out. Not to make you feel bad, but seriously don't post that kind of thing on a social networking site with your name and company information right here. How do you think that would look in court?

I am sorry you had this experience with rent to own. If this had happened to me, I would try and wrap my head around the fact that I am probably going to lose money. I need to work with the party I decided to get into business with and reach the most amicable solution possible. If that involves mediation or court costs, that is what you have to do. Do it all above board.

 

[Sherilynn]

He will not necessarily lose money. If the tenants walk away from the option, then usually their option credits are forfeit as liquidated damages. If the tenants try to sue, they will likely lose, but the RTO owner will likely never recover his legal fees, so offering at least a partial refund rather than going to court is often best. Step one is to get delinquent tenants out of the house, especially if they are crazy and/or litigious.
Step two could potentially be to agree on a new option with one of the previous tenants. That tenant would have to re-qualify on his own, and would have to have option consideration.
While I agree it would be unethical to "cut one person out" by allowing the other person to take over an option that was purchased by both parties, we don't know the whole situation here. If one party pays for an option, and the second party is more like a roommate who has paid nothing towards the option, then the second party may have no claim to the option money anyway. (The fact the male is trying to have the female legally removed from the contracts leads me to believe this could be the case.)
The devil is in the details, as they say.

 

[Thomas Beyer]

Have a word with the male tenant. If he is reasonable, can continue to make payment and qualify for the RTO by himself, evict her only. Once she is out, re-write the deal with him only. She has the right to sue, but may not do that as it is costly.

As Sherilyn suggested getting a non-paying tenant out is critical. So do that first. You may them decide to deal with him only if it makes sense.

 

[Sherilynn]

Yes, "only if it makes sense" is correct. The male tenant would have to re-qualify, and if he has damaged his credit with other delinquent payments, he may no longer be a viable candidate for RTO.

 

[nubiwan]

In my province tenant claims are handled through the tenancy association at provincial level. In order to evict tenant, I simply need to show proof of material breach. in this case, the standard tenant lease. However, not sure how the option to buy portion of our deal would be treated by the association, should an issue arise. They may wash their hands of the claim, knowing the tenant paid up to 5 % down in a related contract for the property.

In a somewhat related aside, should the tenant fail to make financing at term, also a condition on the option, it also has me wondering what my legal obligation would be to the tenant buyer. Even if I make the two RTO contracts exclusive of each other, I can see it being rather messy, if things don't go right for the tenant, and they want money back.

 

[Matt Crowley]

In my opinion, this is why rent to own is usually not a great product for a tenant buyer. There are several programs out there right now for weaker and first time buyers:

- RRSP home buyers plan (works great especially if you have prior contribution room, or you can contribute up to 18% of your annual income, link takes you to CRA website)
- First Place for First Time Home Buyers (Edmonton, http://www.edmonton.ca/programs_services/housing/first-place.aspx)
- Some new First Place homes soon available from Rohit (https://www.rohitcommunities.com/first-place-program/)
- Habitat for Humanity (https://www.hfh.org/habitat-family/)​

Rent to own charges tenants in the 20 - 50% interest range. There is no wonder in my mind why so many of these fail. This sort of financing for on-the-fringe buyers is usually better handled by larger lenders and affordable housing programs. Yes, many of these are for first time home buyers, but the RRSP plan is available for other home buyers (not investment) under certain other restrictions.

In order to come to a dollar value for anything, you need to look at the customer and offeror perspective. Most of us have heard about the "risk" of the investor...but what about the risk of the customer:

- Pay 5% initial forfeitable deposit. If they can't purchase they lose...everything? Well, maybe you will give them something back. But make sure you write in your contracts they are owed nothing?

- Pay above market rents with forfeitable option monies. Again, what is their upside here?

- Sell the property to them above market value in several years. What is the value of their probable upside? Statistically about 30 - 50% of rent to own's fail. So take their initial deposit and divide it by 0.3. For an example, say they put $10,000 down. They have a 30% chance of succeeding. $10,000 / 0.3 = $33,333 (which includes the return of their $10,000). This means, for them to make a financially rational decision, even at a 0% return, the client must have an expected total return on their initial option money of $33,333. This means that if you initially bought the house and rent to owned it for $200,000 they would need buy the home with a minimum expected market value of $233,333. Now of course, almost every rent to own company is going to inflate the price of the home to capture their "risk"....Now the inflated price of the house when the client is able to purchase is $225,000. Can you see why this is not a very good product? It is not financially rational. There are almost always better products out there for weaker fringe buyers.

 

[Sherilynn]

In my province tenant claims are handled through the tenancy association at provincial level. In order to evict tenant, I simply need to show proof of material breach. in this case, the standard tenant lease. However, not sure how the option to buy portion of our deal would be treated by the association, should an issue arise. They may wash their hands of the claim, knowing the tenant paid up to 5 % down in a related contract for the property.

In a somewhat related aside, should the tenant fail to make financing at term, also a condition on the option, it also has me wondering what my legal obligation would be to the tenant buyer. Even if I make the two RTO contracts exclusive of each other, I can see it being rather messy, if things don't go right for the tenant, and they want money back.

Tenancy court cannot deal with interest in the property. If the Option to Purchase is still valid, the tenant's Option can be registered on title as a "purchaser's interest." Anything dealing with title to a property usually gets sent to Queen's Bench. Of course, after a substantial breech, the Option is void, but in rare cases the tenant may claim it is still valid. And unfortunately, clerks don't judge the validity of a claim when the person tries to register it on title. (We had a tenant register an expired option on title.) Likewise, the Tenancy tribunal will not be able to judge whether a title claim is valid. As soon as the tenant says "option," you will be sent to a higher court.

This is where wording of the contract becomes critical. You must be very clear in your discussions, emails, and contracts the tenant "is a tenant with an option to purchase and NOT a buyer with equity." You must also be careful how you discuss the "5% down" as that implies a down payment causing an equity interest. Rather, the 5% is Option Consideration which buys the Option to Purchase.

Careless wording and use of terms related to buying rather than lease options could put you in an awkward position in court.

Your question about the tenant failing to "make the financing" cannot be answered without knowing the exact wording of your contracts. Typically, options state a reasonable portion is refundable and the remainder is forfeit, but it depends on your contract specifically.

 

[nubiwan]

@ sweetzone - I charge a 4-5 % appreciation per year. I do this to calculate the rent credit portion added to the monthly rent. It occurs to me that when the tenant buyer goes for financing, they will need to have the house appraised. If that valuation falls below my estimate, then I might be inclined to accept the market valuation, to sell the home. Conversely, if the appraisal is somewhere north of my estimate, then I have left money on the table, and the buyer would benefit. The rent to own gives that person, who cannot or will not ever save a down payment, or has nor RRSP, the opportunity to live in a nice house, while paying pretty close to a mortgage rate on the property. At least, that is the situation my tenants find themselves in. Yes, they pay more than rent rates, but they pay not much more than the actual mortgage payment would be (and the associated taxes.) if they had bought the home. I also cover any insurance on the home, so the tenant only has to buy content coverage for 2-3 years. I still think my tenants hold the cards in the two scenarios pointed out above. That is, breach of lease agreement, or end of term financing. Ultimately, I want my tenant to buy the house, but pay me on time along the way.

 

[Sherilynn]

In my opinion, this is why rent to own is usually not a great product for a tenant buyer. T... Can you see why this is not a very good product? It is not financially rational. There are almost always better products out there for weaker fringe buyers.

You have some very unusual interpretations of RTO. For instance, there is no "interest" charged in RTO. (There are too many inaccurate statements to address them all.)

While there are a handful of predatory companies who operate in an unscrupulous manner setting tenants up to fail, there are many RTO companies who operate in a responsible manner and create a win/win for both the tenant buyer and themselves.

Your statement that 30 - 50% of RTO's fail applies more to the predatory companies and not to the professional companies. As with any business dealing or major purchase, consumers should do a bit of research to ensure they are dealing with the latter rather than the former.

 

[nubiwan]

I personally have had a lot of tenants back out of rent to own deals simply because the nature of their employment (oil sector) has them transient, and they simply back out of the option because they needed to move. They all make great money, but have poor credit, and no savings. My option worked for them initially.

This unfortunately happened about 5 or 6 times on one property I have owned over a period of 4-5 years. My current tenant has been in 20 months on a 36 month RTO, which is something of a record for that home.

 

[GaryW]

- Pay above market rents with forfeitable option monies. Again, what is their upside here?

- Sell the property to them above market value in several years. What is the value of their probable upside? Statistically about 30 - 50% of rent to own's fail.

I'm assuming you mean by "above market rents" is including the option money and their upside is forced down payment savings in a program that works hard to ensure they will qualify, hence Sherilynn's comment "Responsible Manner".

As for selling the property to them above market value - when you deal in this realm, the RTO buyers "tell us" their upside, as many don't want to wait, even though they know they are still tenants and still paying rent, especially the corporate clients.

If you hear someone saying they do RTO's and act as if it's easy, those are the 30 - 50%! Not the "Responsible Manner" people.

 

[GaryW]

I personally have had a lot of tenants back out of rent to own deals simply because the nature of their employment (oil sector) has them transient, and they simply back out of the option because they needed to move.

We can do all the homework we want, but unfortunately this does happen and in my case the husband was offered "Fly-In / Fly-out" at the end of the 2nd year of a 3 year term. We actually kept the relationship , I'll say "ok" and he signed a quit claim document I attained from Barry McGuire.
My other comment on this, is when the tenant-buyer doesn't choose to leave on their own. That's where we need to see what Real Estate Cycle we are in for best results, as early 2009 would not have been a great time to have an RTO term end. Another great reason to wait for a better tenant-buyer who can qualify at or less than 2 years, in my opinion.

 

[Thomas Beyer]

RTO is a senior strategy with all sorts of possible legal and real world complications. Ensure you have the proper ( legal ) training, marketing acumen to attract possible tenant-buyers, enough real world real estate experience, the right legal contracts that differ by province, the required flexibility when things go wrong and the right amount of people skills to handle tough decision as it is not only about real estate but mainly about the people with a challenged life within the real estate.

Not a junior league strategy !

The potential far higher cash on cash return has to be seen in light of the considerably higher risk and work required to successfully execute an RTO vs a classic buy and hold venture !

 

[Cory Sperle]

Reading this thread cements my apprehension towards RTO. I had looked at it a bit 10 years ago, but decided it was too complex and too confrontational to pursue. As sweetzone has mentioned, if I put myself in the place of the buyer I can't see the benefit compared to other buying options. I am sure like options trading, if one is educated and experienced they can do very well, but the potential for failure is huge, compared to buy and hold with modest leverage in a location with strong fundamentals.

 

[Sherilynn]

decided it was too complex and too confrontational to pursue.

Complex? Yes. RTO is an advanced strategy.
Confrontational? Never, unless the company is either predatory or disreputable.

if I put myself in the place of the buyer I can't see the benefit compared to other buying options.

There are huge benefits to the buyer:

• they can lock in a price today rather than risk higher price increases in a quickly rising market. Many of our clients get free equity when they buy.
• they can set down roots and make a house their home. We treat clients like future buyers rather than renters, and they need not move to transition from renting to buying.
• clients may improve the house or even do a full renovation, for more potential free equity. How often can one get into a fixer upper or dated house for next to nothing "down" and still enjoy almost all of the benefits of sweat equity?
• we provide a bridge to home ownership for people who have no other options. Our clients either are new to the country or have a new business, or have had past issues (such as a business failure, medical issue, or divorce) that has damaged their credit preventing them from buying any other way. They have good habits but need more time before a bank will approve them.

If you spoke to my clients, you would see the benefit.

 

[Cory Sperle]

When you say "no other options" is renting not an option? Please paint me a scenario where this would make sense to me? I know of no one personally who has done this, and all those that fall into your category of a bridge to home ownership rented until they were able to bank qualify and then purchased. Perhaps I am missing something here.

 

[bb2]

I have done a number of rent to own deals recently and feel it is best to take advice from someone who has actually been in that market place for awhile. It is definitely a senior strategy and can be time consuming, but is incredibly rewarding for all parties involved.
I love my buy and holds but there is nothing like a grateful tenant buyer!

 

[Sherilynn]

When you say "no other options" is renting not an option? Please paint me a scenario where this would make sense to me? I know of no one personally who has done this, and all those that fall into your category of a bridge to home ownership rented until they were able to bank qualify and then purchased. Perhaps I am missing something here.

Yes, renting is an option, but the questions were related to other buying options.

Here is an example of how we were able to help a family in ways no regular landlord could:

• their credit was okay, but the wife had been on maternity leave and her verifiable income was too low to qualify for the house they wanted, so they turned to us. (She had a new job by this point, but the bank insisted on more history before considering her income as "verifiable.")
• they put down nearly 5% in option payments on a house in Calgary.
• we agreed to a 6% markup per year for 2 years. We were confident prices in Calgary would rise more than that.
• They did. In fact, they rose substantially more than that, meaning the client was able to buy the house for much less than the house was worth.
• So if the clients had rented for two years and then purchased the same house, they would have paid the same rent but they would have paid a great deal more for the house.
• Furthermore, the wife was laid off halfway through our RTO term. They fell behind on their rent for a while. Had they been in a regular rental, they would have been kicked to the curb. However, because of their substantial option payment and because the house was already worth more than our agreed final price, we felt we had the security to handle the arrears for a short while.
• Instead of being evicted, they were allowed to stay in their dream home, and were able to successfully purchase the home at the end of the term.

Does this adequately demonstrate the potential benefits to the client? (This client's testimonial is on my website, if you care to read it.)