Since I had decided that a rent to own was most likely the best way for me to get my feet wet with a real estate investment, it was time to figure out how I was going to do it. From reading several Canadian-based literature on real estate investing, with a focus on rent to owns, there was a few things I was going to need to figure out before I purchased a property.
Below are a list of the things I needed to get figured out before losing my real estate investing virginity.
- An Application. I created a two page application that I would send anyone that was interested. It let me know their income, gave me permission to check their credit rating, their previous rental history, as well as how realistic their criteria was for the type of home they were looking for. Almost everyone thinks they can afford more than they can!
- An Agreement. The agreement is set up in two sections: A standard rental agreement that many landlords use for their monthly rental properties, plus a section that deals with the specific details of the rent to own portion of the agreement. These details include agreement length, down payment required, monthly down payment required, yearly appreciation on property, and details of any specific terms upon closing. This is not by any means a complete list. You can add or remove specific terms for specific deals.
- Amount for initial down payment. The down payment is in place to make the client more responsible. Clients will treat your property with more respect since they have a vested interest in the property. My only debate was how much to ask for. It had to be a significant amount, but at the same time I had to realize that these people are seeking my services because they can’t qualify for a mortgage. I settled for $5000 down.
- An added amount to charge monthly. This amount is paid on top of the rent and gets applied to the purchase price at the end of the agreement. After reading many articles on rent to owns, I decided to charge 20% on top of the rental amount.
- Yearly appreciation on the value of the home. I decided on 3% per year for my immediate area of Prince Edward County and 2% for outside of the county. Of course I could charge more or less, but I decided that was a fair figure for the time being.
- A way to find clients. I ran a simple and honest ad on Kijiji, which basically called out anyone that was having trouble qualifying for a mortgage that I could provide an alternative. I also mentioned that I was just one person, not a company, looking for a mutually beneficial relationship.
The Client Search Had Begun!
With that out of the way it was time to find a client. Quickly after posting the ad I was getting 10-15 inquiries a day. Each inquiry I would send a long detailed reply explaining what a rent to own entailed. Those that emailed back received the application. Unfortunately, most of the applicants did not have a hope. Just not enough income to support a mortgage in the near future. After a few weeks I did manage to come up with 3 potential clients out of 150 replies to my ad and over 2000 views on that ad.
Once the first legitimate candidate was chosen, I forwarded criteria to my real estate agent so she could find them some homes to consider. As with most, I had to adjust their price down to be more in line with their income. My realtor sent me back about 5 homes the next day, which I first examined and then sent off to the clients. They expressed interest in 2 of them; 1 of which I thought was the best of the initial 5.
The following weekend we scheduled a viewing for the two homes and got to meet with the clients. I took the opportunity to let them know how the process works (a refresher from our email conversations) and gave them my criteria for the rent to own agreement. For the homes they were looking at I would require $1000/month (heat, hydro, water extra), 20% added monthly applied to the final purchase price (so $200/month), plus an initial down payment of $5000 (half due once purchase conditions were met and the other half due with the first month’s rent). They seemed fine with all the terms so I thought we were home free. Think again.
That’s When it Happened…
The first house we saw they absolutely loved. They had plans for each of the rooms and their daughter’s school was visible from the backyard. Seemed to be a perfect fit. They told me that this was the one, so we discussed what I thought we could get the house for. I also made sure that if we had to go full price they were ok with that. They said that is perfectly fine, but we’ll get back to you in the morning just to be sure. At that point I could see that reality was starting to set in and their indecisiveness was starting to show.
From that first day we went on to see another 12 houses over a two week period; none of which compared to the first house. I kept my cool the entire time, but I eventually did tell them we need to make a decision! So at the end of our viewing marathon they did decide on a house. It wasn’t the first house, but not a bad alternative. We went over the agreement again to make sure that they knew all the numbers. They were adamant that they were good with everything, but again asked that we wait until I hear from them in the morning. Right then and there I knew it wasn’t good.
The Final Blow!
The next day the client emailed me and told me they no longer had the $5000. They also wondered if I would still be able to do the deal. I told them I wouldn’t be willing to do that at this time. It was upsetting that I had wasted a month of my time and my realtor’s time, but it did allow me to make a few changes to the rent to own operation. I decided that clients could view homes on their own and then we would accompany them on any second looks. Also, I decided that I needed to do more due diligence in financials before anything else.
Three months later the same rent to own client contacted me to see if I would give them a second chance. I told them yes, but I needed $10,000 down and I wanted proof of where the money was coming from. I haven’t heard from them since!