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Rent to Own - default and eviction

Dejavu

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Hi All,

I have a rent to own in Barrie, ON where tenants are in default and looks like I'll need to go the eviction route. I have one lease agreement which contains language regarding the option to purchase (as opposed to two separate Lease and Option agreements).

At this point I am unsure whether this can go through the Landlord and Tenant Board or do I need to go through the courts. I'm speaking to my lawyer but he doesn't have a lot of experience in tenant issues.

If anyone has experience with evicting rent to own tenants in similar circumstances, would appreciate any feedback or pointers. Thanks!
 

Matt Crowley

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If it is a default under the lease it will fall under Landlord and Tenant Board. Very muddy because option and lease together. Best route is to try and work it out with tenant as all bets are off when you go to court (especially with the hugely punitive clauses in most R2O contracts)!

Probably the tenant could sue under contract law on the option side if there was no reasonable expectation they could succeed or usury interest rates. IMHO, we should not be charging people 50%+ interest rates on purchasing a home and there should be laws prohibiting this as clearly failure of R2O is at least as likely as success.
 

Sherilynn

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In Alberta, if there is any question about a potential purchaser's interest in land, then it gets kicked up to the Court of Queen's Bench. This is the case even if your option states it is void if the tenant is in default (which is silly). However, if the tenant doesn't appear at the tenancy hearing to contest the eviction, then there is usually no issue. If the tenant shows, then he will likely mention the option even if it isn't mentioned in the lease and the matter will go to the QB.

If your lease mentions your option, then you may not be able to squeak it through a tenancy hearing, but it could be worth a try.

For those of you confused by Matt's post above, there is no interest involved in an RTO, and - if the RTO is properly structured and the tenant is well-screened - the tenant buyer is usually better off taking this route than if he were to gamble on house prices two years from now. Either way he is renting until he can buy, so he may as well lock in to a price today and live in his 'forever home' now.
 

dplummer

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I've used April Stewart from Landlord Legal in Barrie. They call her "the terminator" Believe me she gets the job done. 705-812-2267
 

Dejavu

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Thanks All for your replies. Yes, I reached out to a few contacts who also mentioned April Stewart and she is on the case:) Based on what I have learned from authoritative sources - whether you have a straight rental arrangement or a rent to own, if you are on title and your tenants are not (which should be the case in most circumstances) any disputes between the two parties fall under the jurisdiction of the Landlord and Tenant Board in Ontario. The Board hears these cases all the time and any Option related "noise" is excluded from the hearings. As long as there is clear delineation of Lease/Rent and Option payments and the Lease is clear on that, anything related to the Option to purchase is irrelevant.

Re Matt's message above, there are some far-reaching assumptions there but I understand what you mean referencing "most RTOs" as I've seen different ones over the years. We do structure ours differently.

We've been doing RTOs for a while and are averaging about 60% success rate (tenants buying on exit). For the remaining 40% we've always been able to negotiate an amicable separation. This case is the first one going into eviction. Of course, the "rubber will hit the road" at the LTB hearing. Once we get through it, will post the outcomes here.

Thanks again for the information and pointers!
 

kfort

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Take this with a touch of salt as all I've ever done with rto is study it ... isn't 60% success rate quite low? Is there something in your system of qualifying tenant buyers that could be improved upon?
 

Dejavu

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I'd say 50-60% is about average. I suppose there is always room for improvement but there are many variables that are outside of the investors control no matter how well you qualify them: marriages break down, people do really silly things for no reason etc.case in point- this eviction. There is absolutely no reason for them to default. They have the income to afford it which was verified. It's just paying for the roof over their head is a second priority relative to all their toys and vacations. Go figure.
 

Sherilynn

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I would agree a 60% success rate is a bit low, but then again we are a bit different than many RTO companies.
  1. We don't accept tenants with current credit issues. Credit must be on the road to improvement with only minor adjustments required. If they have current collections or a recent history of late payments, we send them off with homework and encourage them to reapply later.
  2. We require a fairly substantial initial option payment. If we already own the property and are looking for an exit, we may accept as little as 3% of the purchase price. If we are buying the property for a tenant to RTO, then 5% is the absolute minimum. And a lower initial option requires higher monthly option payments. The more skin a tenant has in the game, the more likely it is he will work to ensure his success.
Rent to Own isn't for people with low income and terrible credit. It is for people with higher income and improving credit.
 

Dejavu

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That's an interesting perspective, Sheilynn, thanks for sharing. We also do higher down payments, some higher than 5%, but we've never had anyone with even semi-decent credit. We rarely buy from MLS for rent to Own and mostly do rescue refinance- meaning the clients own the home and are behind on their mortgage/being foreclosed on. We buy the house, cash out the existing lender and lease back to the clients. By the time we buy the house their credit is ruined with mortgage arrears, judgements etc. Divorces have been the main reason for clients not closing.
 

Sherilynn

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Lease-optioning back to the sellers is a dangerous game and one I would never do, especially if the sellers have bad credit. If a person can't manage to keep his house the first time around, it is highly unlikely he'll be able to do it the second time.

RE investment companies can still rescue the sellers by buying their houses and saving them from foreclosure, but it is much safer to find different tenant-buyers.

Companies could be viewed as predatory and could be sued, especially if they are getting a deal on the house and the seller turned tenant-buyer is unlikely to be able to qualify to repurchase the house.

It is important everyone understand the risks before considering this type of transaction.
 
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Dejavu

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Well, nothing wrong with being blunt but everyone's business model and the perception of risk is different. I would NEVER go ski diving as I consider it a highly risky activity, doesn't mean others perceive it the same way.

People sue when they feel they are being treated unfairly. We don't engage in any unfair practices. We buy these houses at market. Also, our down payment deposits are refundable under certain circumstances. Likely not many can say the same.

We help people save their houses from (mostly) second mortgage private lenders and give people a second chance to keep their house. After coming so close to losing it, all without exception have an awakening and work really hard to improve their credit and keep their house.

We also work with them individually. For some, we prepare monthly budgets and cash flow schedules and teach them to manage their finances. For others we even financed first mortgages on exit from our own funds to give them an extra year to get a bank mortgage and cash us out.

We believe in giving people a second chance.

Not that I feel I need to justify anything on here but it just bothers me when people jump to conclusions a bit too quickly.

Like I said earlier, most that don't buy back are because of divorces. This is the one we can't do anything about, unless I bring a marriage counselor on board:)
 

Sherilynn

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It sounds like you have reasonable systems in place. The fact you are paying fair market value rather than a highly discounted price for the properties makes a huge difference.

I worded my above post poorly so I edited it. It was meant to be directed more towards the readership in general. You would be amazed how many people are considering doing lease-backs to sellers with no such systems or tenant credit training plans in place.

The strategies you are using are certainly NOT meant for novice investors, hence my desire to caution people.
 

Dejavu

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No worries, I understand and agree that these strategies aren't for novice investors. Cheers.
 

Thomas Beyer

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Well, nothing wrong with being blunt but everyone's business model and the perception of risk is different. I would NEVER go ski diving as I consider it a highly risky activity, doesn't mean others perceive it the same way.

People sue when they feel they are being treated unfairly. We don't engage in any unfair practices. We buy these houses at market. Also, our down payment deposits are refundable under certain circumstances. Likely not many can say the same.

We help people save their houses from (mostly) second mortgage private lenders and give people a second chance to keep their house. After coming so close to losing it, all without exception have an awakening and work really hard to improve their credit and keep their house.

We also work with them individually. For some, we prepare monthly budgets and cash flow schedules and teach them to manage their finances. For others we even financed first mortgages on exit from our own funds to give them an extra year to get a bank mortgage and cash us out.

We believe in giving people a second chance.

Not that I feel I need to justify anything on here but it just bothers me when people jump to conclusions a bit too quickly.

Like I said earlier, most that don't buy back are because of divorces. This is the one we can't do anything about, unless I bring a marriage counselor on board:)

Well said.

Also, no one is forced to sell. The market provides answers to many problems and if you provide an answer that is superior in the sellers' eyes then you offer a valuable service.
 

Thomas Beyer

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The strategies you are using are certainly NOT meant for novice investors, hence my desire to caution people.

RTO or lease options are indeed for the more advanced investor. Even a simple buy-and-hold with a tenant is not that simple. I have done dozens and dozens of real estate investments and decided too that I do not want to do a rent to own by myself but with some expert like Sherilynn.

Many folks see only the shiny sexy tip of the profitable real estate iceberg but not the work required ie the 90% of the iceberg you don't see.
 

Sherilynn

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I have done dozens and dozens of real estate investments and decided too that I do not want to do a rent to own by myself

Yes, RTO is so simple in theory but can be incredibly complicated in execution. Profitable, yes, but it is an active business in every sense. Definitely not for the faint of heart.

"The shiny sexy tip of the profitable real estate iceberg?"...I like your poetic musings. ;)
 
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