“Do you have any rent-to-own properties?”
It just may have replaced yesteryear’s most frequent floor call question: “Do you have any properties that would be good candidates for a flip?”
Both questions come from property virgins (to borrow a term from HGTV) who honestly believe they may be able to get into a struggling or a red hot real estate market on their own terms. The Rent-to-Owners know they do not qualify for standard financing, but they still want to own a home. The Flipper-Wannabe does not know how to identify a good flip candidate, but they believe whoever answers the phone does. That unknown agent on the other end of the phone has an ideal house that nobody else has noticed, and it is ready and waiting for someone who wants to make a quick 50% profit.
It’s the Rent-to-Owners (RTO) that we hear from most often, though, in the current market. Flipper-Wannabes are waiting until the market starts to turn. They plan to catch the wave of change just as it starts to build—just before most people notice the rising tide, of course. A bad market, the RTO reasons, must mean that there are bound to be sellers desperate enough that they will accept any terms in order to snag a buyer. And there might be, but here are some points to ponder.
First is the fact that the seller has to own the property free and clear. If there is currently a mortgage on the property, the seller is not free to enter into a separate sales contract without satisfying his or her own mortgage first.
If the RTO is a good risk, traditional lenders will be willing to arrange financing, even in this market—make that, especially in this market. Qualified buyers are in short supply right now. The seller who decides to take a risk, then, on an under-qualified buyer is going to have to do something to make that risk worthwhile. That something could be requiring a high interest rate, a significant up front payment (such a buyer probably could have afforded a down payment), a co-signer (again, that buyer could have used this strategy with a traditional lender), or a combination of any or all of those.
When a seller does decide to give the RTO route a chance, they have to be willing to accept the risk that under-qualified buyers will default at a higher rate than qualified buyers. That seller must know the ins and outs of foreclosure and eviction. Depending on how the paperwork is fashioned, the mortgage holder will have to go through the legal expense of both steps, not merely evict. Where is the incentive, then, to sell RTO rather than merely rent? The mortgagor who is not paying is also not performing needed upkeep on the property, and now the seller is faced with mounting legal fees to get the rapidly devaluing property back.
In spite of the pitfalls, there will be some RTOs and there will be some flip sales in all market cycles. All sides of the transaction should know going in, though, that putting the deal together is a long shot, and having the deal benefit all sides is even longer.
©2010 Liz Lockhart liz@lockhartlegacy.com (if you reblog, you must link back and leave copyright tag intact)
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