Rent to Own

[TheLiberalLeft]

I have a place I might want to sell and have tenants in-situ.

Was contemplating offering them first dibs on buying the joint, but I'm not sure if they'd get a loan from the bank. They are good payers (of rent) however.

Then the words "rent to own" popped into my swede.

Can anyone offer any advice on how this is acheived? Any traps for the unwary? Does the property remain in my name with a legal contract (similar to a mortgage) defining the payments and other aspects, or does it become theirs, with a similar document. If it went tits-up obviously the former option means less hassle to recover from the situation, but I've never done this and have no idea, really.

If they said "not interested" then we will give them the normal 60-day notice (I want to spruce it up and sell empty). They would have no grounds to challenge this notice, right? I mean, the TT would in no way ever consider my action as retaliatory? Because it ain't.

[Ahar]

LL....how do you know they won't get a loan?

IMHO I wouldn't mention "rent to buy" until you are sure of this.....my gut feeling is that it could be bit of a nightmare and might turn you into a "trader/developer" thus tainting any other property you own.

Perhaps they should talk to a mortgage broker....if they're interested

And if they can't raise ALL of the mortgage needed, perhaps you could leave in a 2nd mortgage....at an appropriate interest rate

[500million]

Hi LL there is screeds of information on the net about rent to own.
R2O has been a very interesting part of my business since 2006, which has givem me significant cash flows.
Rent to owns are great vehicle.
I suggest you sound them out to see if they have any interest in home ownership at all.
THere are a number od simple questions I use to acheive this and they go like this.
Peter Sally have you guys ever thought of owning your own home? Pause - listen.
.................................................. ..................................
whast preventing you from owning now? Pause - Listen

.................................................. ..................................
Just suppose you could own your own home, how would that make you feel? Pause - Listen

and so on and so on

There is a lot of reasons people don,t own there own home and Its up to you to explore the posibilities with them as your first step.

If you find by asking simple questions and listening carefully you will know very quickly if home ownership is important to them.

My experience with my existing tenants steping in to a R2O in the house they have been renting is, unless they are totally in love with the place, all they see is the problems with it.

If you decide that rent to own is a way forward for you, for what every reason, then I strongly recomend that you look for other R2O tenants.

Paper work is very simple and made up of two separate components. A tenancy agreeement and an option agrremeen. Keep the two separate.
If you were doing this all the time as a business then you would be a trader or what ever.
By offering someone and option two buy there is nothing sinister about that at all. just because i give some one an option to buy my car in 6 months time it doesn't mean I am a car trader.
Obviously there is more to it, but this is enough to get the ball rolling for you if you decided to go down that line.
If you or anyone else wants to discuss R2O or any other part of Vendor financing (VF) or other creative property transactions or how to buy a house for $1.00 then just give me a call 021556683. I just love to talk about anything property.
500million

[Wayne]

Peter Sally have you guys ever thought of owning your own home? Pause - listen.
.................................................. ..................................
whast preventing you from owning now? Pause - Listen

.................................................. ..................................
Just suppose you could own your own home, how would that make you feel? Pause - Listen

I would suggest not trying the sell! How about you just talk to them like real people rather than 'marks'. Tell them that you are thinking of selling, suggest they might like to buy. Suggest they need to get a valuation (assuming you don't want to rip them off) and see a mortgage broker. Suggest from that that you might be able to help with some vendor finance but they will need an independant lawyer to discuss the implications for them. Straight-up, no emotion.

[TheLiberalLeft]

If rent-to-own is akin to vendor finance then I assume the property is placed into the tenant's name? If that's the case I worry about if things go tits-up? I don't have the resources of a bank to call in mortgages so I imagine recouping in a worst case scenario is long-winded, diffficult, stressful for all concerned (me especially) and expensive.

[Ivan McIntosh]

Rent to own pretty much invariably stays in the landlords name, but if the renter pays long enough at the negotiated higher rent, and doesn't otherwise breach the tenancy, then they have an option to purchase the property at an agreed figure.

They are most dangerous for the tenants, who carry the risk of the landlord getting in financial strife.

[essence]

Hi LL

You don't say whereabouts the property is. If it is in Auckland, I'd strongly recommend NOT selling unless you financially have to.

Auckland has got a housing shortage atm and it's only going to get a lot worse. John Key was on TV this a.m. and said a housing boom is on it's way in Auckland. Whilst that is probably true, there is always a lag between demand, consent and build (18 months to 2 years).

In the interim, house and rental prices in auckland are going to go up dramatically.

Edit - just checked out more news and found this.

If the Government doesn't know what's going on, how is Joe Public!!??

[Davo36]

Well forecasting is a tricky business, especially about the future.

Key also often tends to just speak his mind i.e. he doesn't stop, think about the political and market ramifications of what he's about to say and modify accordingly. Which is a good thing. It makes him a more honest person IMHO.

Whereas Bill English is like "Whooaaa slow down now, we don't want any talk of a housing bubble thank you very much."

JK's comments will have a big effect on the market I reckon. It'll just speed things up. Bring it on I say!

[TheLiberalLeft]

That being the case, Ivan, it makes me wonder why any tenant would enter into such an arrangement. Sounds way too risky to me (for the tenant). The only reason I can think of is that the tenant loves the property AND cannot source a loan from any mainstream source. But why would a landlord take them on if they're seen as a big risk to a bank?

And how do the numbers work?

Assume a place is rented at $300/wk. If it's rent-to-own, this number has to rise. Let's say to $500. That $200/wk extra will take more than the std 20 years to pay off. I don't geddit.

Can someone give me a real or even realistic example?

[TheLiberalLeft]

The cynic would suggest that Key knows exactly what he's saying and that he's setting it up for an "I told you so" and as a fore-runner to the inevitable slashing of councils' budgets and staffing levels.

[TheLiberalLeft]

essence - no not Auckland. Far North.

[500million]

I would suggest not trying the sell! How about you just talk to them like real people rather than 'marks'. .

The beautiful thing about VF is that the limits to how a transaction is put together really are only confined by the individual’s ability to think laterally. Being able to think laterally to structure a transaction comes down to three things.
(1) Understanding the problem.
(2) Knowledge and education.
(3) Experience.

99.99% of people have a very limited understanding of VF and what it is, and their understanding is limited to a simple transaction whereby the Vendor leaves in a certain amount of money in a sale for a period of time. An example would be the Vendor leaves in 10% for 12months.

VF being a broad topic takes in the areas of property or business or any other transaction where two people make an agreement to exchange goods or services.

With property a sale can be put together in any shape and form, from a sale and purchase agreement which everyone knows, this is what I call the transaction vehicle, it can be a Vendor Mortgage or an Option, a Trust, a Joint Venture and more. It often is a hybrid of any of the above and the vehicle will depend on the problem that is looking to be solved and what both parties want to achieve. Each of the vehicles has their own characteristics and gives a greater or lesser degree of certainty as required.
Each of these vehicles has any number of possibilities as to how they can be put together.
Within each of those vehicles there will be the conditions that will spell out the terms that each party wants and agrees to and these may include elements of finance such as mortgages in some shape or form, R2O, interest rates, term / period, default , responsibilities, liabilities.
One thing that is for sure it that when it comes to VF the law of contract pretty much says that what two people agree on is the contract and what two people agree on is really about how they seek to get what they want or need and solve a problem between them.
VF cannot be pigeon holed or limited other than by certain elements of law, yet within the confines of certain elements of legislation the opportunity for VF is unlimited.

[Ivan McIntosh]

People usually get into them through ignorance, signing up and often not consulting their lawyers at all...because they think they only need to do that when the conveyance comes around. They don't consider the risk of their landlord getting into trouble, or of the landlord refusing to honour the option agreement if they've had some payment trouble (to be fair, many landlords wouldn't take such a rigid stance).

If possible, the right way to do it is to get the landlord's mortgagee to agree to the rent-to-buy scheme - usually by agreeing that any mortgagee sale will be on the basis of the rent-to-buy agreement - and lodge a caveat to protect the tenant's interest. It can be difficult to get that agreement...I have occasionally seen it in the past where someone builds a bunch of houses and tenants them on the basis of rent-to-buy agreements. The bank will come to the party because it can see the additional cashflow from the rent-to-buys and has agreed right from the word go in approving the project; it isn't being asked down the track.

As to an extra $200/week, really they're just saving the deposit. That's 1-2 years, not 20.

[Xav]

That being the case, Ivan, it makes me wonder why any tenant would enter into such an arrangement. Sounds way too risky to me (for the tenant). The only reason I can think of is that the tenant loves the property AND cannot source a loan from any mainstream source. But why would a landlord take them on if they're seen as a big risk to a bank?

And how do the numbers work?

Assume a place is rented at $300/wk. If it's rent-to-own, this number has to rise. Let's say to $500. That $200/wk extra will take more than the std 20 years to pay off. I don't geddit.

Can someone give me a real or even realistic example?

I believe the way they are usually structured is that the tenant continues to pay rent under whatever your standard form tenancy agreement is at the usual rate. You should be wary of increasing the amount payable under that agreement due to section 25 of the RTA. In addition, you and the tenant enter into an option to purchase the property which gives the tenant the right to buy the property provided that:

1. The tenant has paid you an option fee of $x per week;

2. The tenant has not breached the tenancy agreement;

3. Whatever else you want them to have to do that isn't in the tenancy agreement.

The option agreement would provide that they can exercise the option by making you an unconditional offer on the ADLS standard form at a specified purchase price (and settlement date etc), with a deposit equal to however much option fee they have paid you at the time (or a percentage thereof), which you would acknowledge has already been paid.

The option to purchase gives the tenant the right to register a caveat (unless the agreement prohibits it, which some of them do) but that will rank behind the bank, as Ivan has referred to. The primary risk from the tenant's point of view is the property being sold for less than the bank is owed or the landlord trying to cancel the option agreement. Provided the agreements are properly drafted (including appropriate rights for you to cancel it) then I believe the landlord's risks are largely the same as under a standard tenancy.

So to give you an example, say the purchase price is $300,000, rent is $300/wk and option fee $200/wk. After three years the tenant has a deposit of $30,000 (10%), assuming that 100% of the option fee is applied as deposit. If the property has increased in value then that could also help the tenant in getting finance (although the reverse obviously also applies).

[Ivan McIntosh]

Good point about the rent, thanks Xav...the extra is paid under the option agreement, not the tenancy, as you point out.