# Rent-to-own Investing



## jamesbe (May 8, 2010)

Hi,

I've been looking at these types of investments for a few months now and have come across a deal I can afford to invest in.

There are two options on the deal
1) 1st investor with $25k who holds the title
2) 2nd mortgage investor with $19.5k doesn't hold title but holds second mortgage.

I'm leaning towards the second option for my first deal since it seems inherently less risky than being the title holder. Of course because of this the ROI is lower, half that as the first investor.

I'm trying to wrap my head around this as I do not see much risk involved as the investor here. I guess the biggest risk is that the 1st investor never pays me back but this is all going through lawyers and a company that specializes in this type of deal.

Are there things I should be looking for, pitfalls I should understand and questions I should be asking to ensure that my money is safer? I keep coming back to the worst that can happen is the "renter" drops out and the place needs to be sold but as the second investor I would just be out my money until sold which doesn't sound like a big deal to me.


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## NorthernAlex (Jul 26, 2009)

Make sure that the company who is offering has experience with R2O. 

Ask for proof records of other investments they did.

Ask for names of other investors to talk to (or that they call you, but don't offer that right away).

Check with a real estate savvy friend if the math presented makes sense and the mentioned purchase price is market compliant or better below.

Did you get info about the tenant? Like who they are, how much they make, where they work, what their story is for the bad credit or low credit rating?

Just brain storming.


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## Shayne (Apr 3, 2009)

jamesbe said:


> Hi,
> 
> I've been looking at these types of investments for a few months now and have come across a deal I can afford to invest in.
> 
> ...


If the second mortgage is not registered on the title how is it secured at all?

If that is the case you have literally no recourse in the event the borrower defaults. 

Based on your post I would keep your money until you fully understand how things are set up and the risk involved.


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## jamesbe (May 8, 2010)

Thanks for the info I will find out. Perhaps the 2nd investor is on title I am not 100% certain. I will get more info later today.


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## jamesbe (May 8, 2010)

Second mortgage holder is on title.

First mortgage holder must come up with the 20% down but will be reimbursed the 10% on closing, that's how the numbers came out to 10% and 10%. The company has done 3 deals and is a new company ... so will tread with caution for now.


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## dagman1 (Mar 3, 2010)

I don't think you fully understand how this works... so I would stay away.

Someone who holds title is different than someone who has security on title. If you don't even know the difference between the two, you probably should be getting into the second mortgage market.

It sounds like when you say "first mortgage holder" that is actually the second mortgage holder and "second mortgage holder" that is actually the third mortgage holder. What they are doing is getting you two to provide the 20% down-payment on the house that is rent to own, the other 80% belonging to the first mortgage holder.

So if housing goes down even 10% you will have no prospect of recovery, or if the foreclosure only yield 90% of the value, minus costs, you will have no recovery. If you consider the state of the housing market right now, it sounds like a very risky deal.


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## jamesbe (May 8, 2010)

I understand fully how this works perhaps I am not using the terms you use.

The first mortgage holder is the bank they own 80% like you say
The first investor owns 10%
the second investor owns 10%

Where are you located? I really do not see values in my area (Ottawa-Gatineau) taking a dive anytime soon, especially not 10%. YOY growth has averaged 7% since... well forever in Ottawa.

This particular property is in Gatineau which has lower values to start so potential loss is extremely slim. You are also assuming that the tenant bails, don't forget if they do their initial downpayment and subsequent payments are kept by the investors. With this property that is $500 monthly + $3000 downpayment that is plenty to cover any losses in the market should they bail and the place cannot be rented or sold.

It really seems like 99% of the posters on the forum are paranoid these days, everything I read is don't invest in the market or in real estate. Many are forgetting that when people are paranoid that IS the time to invest.

All that said, like I said, must tread lightly as this company does not have a track record yet.


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## Berubeland (Sep 6, 2009)

Jamesby, 

What you need to watch for is this. 

House is being sold way overpriced !!!

i have seen a scam that goes like this. Guy buys house for a song in horrible condition, renovates & finds RTO buyers who will take it on at an inflated price (actually they usually compound 5 or 6% on the inflated purchase price) that way they then find a renter who will pay their high rent and extremely high house price. 

Then they pass on the risk to you. You may be paying your deposit on the investment on the inflated price and the guy who has structured the deal is free and clear of all their liabilities. Lots of these deals fall through and you go to sell the house but it's over market by tons. 

That's how you get burned.


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## Berubeland (Sep 6, 2009)

Oh and I'm not against buying real estate at all. I am against paying stupid prices though. All for making money.


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## jamesbe (May 8, 2010)

Thanks Berubeland that is something to look out for sure.

This particular deal there is no "house" Currently there are only "tenants" they must find a house on MLS and put in an offer to purchase, the investors will then purchase the property if they are comfortable with it.

This is the only type I would be interested in, certainly not one were the owner wishes to cash in on a winfall.


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## Dana (Nov 17, 2009)

There are risks inherent in being a 2nd mortgage holder, that is why 2nd mortgages are priced higher than first mortgages. If the mortgagors default on payments to the second mortgage holder (you), you cannot proceed with power of sale/foreclosure without consent of the first mortgage holder - which won't happen as long as the borrower is making payments as agreed to the first mortgagee. 

Your only options at this point are:

1. wait it out and hope for payments (secure in the knowledge that you can stop a sale or title transfer until they have paid you up to date)

2. buy the first mortgage out so you can proceed with power of sale/foreclosure. I have known two investors who opted for this option and bought out first mortgages from two major banks. Lots of fees, my friend! 

IMHO, there is less risk for you as the owner of the property in a rent-to-own agreement as your tenants will have to forfeit whatever money is paid to you if they choose to walk away or are not in a position to purchase the property from you as and when agreed in the lease documents.


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## Cal (Jun 17, 2009)

Just to make a clarification jamesbe 'Many are forgetting that when people are paranoid that IS the time to invest.'

The time to invest is when everyone is bailing from it, not when they are paranoid.

I am not trying to predict a bubble or anything, just trying to explain the theory of contrarian investing.

Having said that, there was a tremendous increase in the word 'bubble' in US print media prior to the RE collapse.

So after watching our neighbours to the south, perhaps we should exhibit more RE caution.

What happens if the tenants stop making payments? Maybe they get laid off of work, or if the holder of the first mortgage stops making payments?

I only invest in RE on my own. Why have 2 people involved to split the profits, when you potentially could be on the hook for the whole amount?


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## jamesbe (May 8, 2010)

Leverage? With the new 20% rules it's difficult to get enough down payments.

If the tenants miss a payment they are evicted according to the contract.


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## Four Pillars (Apr 5, 2009)

> Where are you located? I really do not see values in my area (Ottawa-Gatineau) taking a dive anytime soon, especially not 10%. YOY growth has averaged 7% since... well forever in Ottawa.


You're being too optimistic. The whole deal sounds fishy to me. 

1) RE can go down - that doesn't mean it will but you are deluding yourself if you think there is close to zero percent chance it will go down. You are ignoring the potential risk of this deal.

2) I think the fees will be too high. This is a small deal and the fact that there is a third party (the "new company") means they are taking a chunk which leaves less for you.

For those reasons...I'm out.


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## Dana (Nov 17, 2009)

jamesbe said:


> If the tenants miss a payment they are evicted according to the contract.


You mean in a rent-to-own situation, the tenants will be evicted for missing rent payments? This is correct. 

However in a 2nd mortgage situation where you are not on title, and the occupants are not tenants, you cannot evict anyone. I believe the laws governing the mortgage (mortgage lending is federally regulated in Canada while landlord and tenancy laws are provincially legislated) would trump a contract agreed to you by yourself and the borrower regarding eviction. 

Please note, I am not anti-2nd-mortgage, in fact I know that they can be lucrative and have a family member who has done quite well supplementing his retirement income by investing in them, but I think that it is a sophisticated form of investing that requires lots of due diligence, an excellent lawyer as well as experience and knowledge around mortgage underwriting and risk assessment.


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