Is this a good rent to own deal?

[mattman1968]

My agent called me this past weekend with a deal for a rent to own property. He has a couple that want to purchase a house but can't quite afford it. For whatever reason they have locked onto this house and apparenly really want it. They are willing to do a rent to own if an investor (me) can purchase it.

The house is a short sale listed at $195K. I have seen the house and it is in decent shape. It was suggested that I could possibly pick up this house for $170K. That would make my PITI about $1350-$1400 (taxes are high). The couple wanting to RTO have told my agent they would be willing to pay $1800 in rent and purchase the property in one year (two at the max) for $205K. The $1800 would NOT include extra principal that would apply to their down-payment. Anything over my PITI is mine to keep. In addition they would put up $5000 in escrow.

I understand the basics of the RTO, but as I have have never done one I am leary about how much skin they have in the game. Surely I wouldn't want to lose my $5000 but I think I would like it more if they paid at least $2000 a month with $200 of that every month going towards their down payment.

As a whole, how does this deal sound to you? Depending how long it takes the couple to buy the property (1-2 years) I figure I can gross $39K-$43K. After commision and closing costs I estimate I can net about $26K-31K.

I appreciate your insight into this, espcially anything that I can use to make this work to my advantage (or run away if its a bad deal).

[satarnag]

Are house values still in a decline? If so, can this couple finance a transaction based on 205k purchase price? For example, in 1-2 years, if the home is worth 150k, what would you do?

[Investrix]

Wait, so just so I have this right... They can't afford to buy a home for $170k, but they're going to pay you $400-450 over market rent every month, then they're going to be able to afford to purchase the home at $205k in a year?

 


--Sorry I just realized you said PITI was 1350-1400... what is market rent in this area for this kind of asset?

[mattman1968]

--Sorry I just realized you said PITI was 1350-1400... what is market rent in this area for this kind of asset?

$1800 for this type house would be about par for the course. The subject house is located somewhat in my neighborhood plus I know that the guy across the street from me is renting for $1800. It is a similar house.

As I am new to RTO I am trying to find out all I can. It seems to me though that the normal action would be for me to already have a house and offer it for RTO. Not buy it specifically for a couple to RTO. Not that this method can't work.

Anyone who's done RTO care to give advice/pointers?

Thanks

[davewindsor]

--Sorry I just realized you said PITI was 1350-1400... what is market rent in this area for this kind of asset?

$1800 for this type house would be about par for the course. The subject house is located somewhat in my neighborhood plus I know that the guy across the street from me is renting for $1800. It is a similar house.

As I am new to RTO I am trying to find out all I can. It seems to me though that the normal action would be for me to already have a house and offer it for RTO. Not buy it specifically for a couple to RTO. Not that this method can't work.

Anyone who's done RTO care to give advice/pointers?

Thanks

I agree with Investrix.  Something not kosher about this whole deal.  The agent brings over his clients who couldn't close at $170K and they want you to buy it so you can RTO it to them for $205K?   How would they qualify for a larger mortgage in 1-2 years if they can't qualify for $170K?  How do you know they can pay rent each month?  What happens if those tenants want to renegotiate after you buy it?   Say they get a cut in pay, say there are more short sales popping up after you buy it and the property is devalued, say they lied on their application.  What do you really know about them?  Did you do a criminal record check on them?  How do you know they won't turn it into a grow house and destroy it?  Why are they moving from their previous place?  Perhaps you should hire a private investigator to investigate these applicants fully.  IMO run from this deal. 

[mattman1968]

Dave,

Your points are well received. I have wiped the dollar signs from my eyes and have concluded that I would not even want this house as a rental. So, if the rent to own option fails, I definitely would not want this house.

However, with all that being said, all the points you mention would still apply for anybody attemping a rent to own exit strategy. Yet people do it all the time. For whatever reason a couple can't currenty qualify for a loan but enter into RTO arrangements that will allow them to build credit/capital to purchase the house in 1-3 years. I suppose the difference is that those people may be just shy of qualifying for a $205K loan whereas my couple can't even qualify for a $170K loan, let alone $205K.

[davewindsor]

Dave,

Your points are well received. I have wiped the dollar signs from my eyes and have concluded that I would not even want this house as a rental. So, if the rent to own option fails, I definitely would not want this house.

However, with all that being said, all the points you mention would still apply for anybody attemping a rent to own exit strategy. Yet people do it all the time. For whatever reason a couple can't currenty qualify for a loan but enter into RTO arrangements that will allow them to build credit/capital to purchase the house in 1-3 years. I suppose the difference is that those people may be just shy of qualifying for a $205K loan whereas my couple can't even qualify for a $170K loan, let alone $205K.

Here's the thing.  The guys on this board that are making money on RTOs are offering 60% of the ARV minus repairs to buy them.  So, if it's listed by an agent for $195K, the maximum you should offer is $117K and RTO it for $195K and get some kind of good faith deposit or security deposit.  It doesn't matter if it's a short sale price.  Market price is what it sells for through an agent imo.  Most of the guys on here that do RTOs put up bandit signs around town with "We Buy Houses" to find these discounted properties and don't offer more than 60% ARV minus repairs, not 87% of the short sale price (which doesn't give you a lot of play when it doesn't turn out the way you expect).  They're not finding discounted houses through agents.  If agents could find these kind of discounts, they would be buying it for themselves and flipping them.  It's your job as a shrewd investor to find them.

If an agent is bringing you short sales, it's retail.  That's not how you make real money in RTOs

[plcl]

Great explanation on how one should not look at RTO's . It made sense to me now.