All Topics / The Treasure Chest / My Tenant Qualification Process

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  • Profile photo of AdofunkAdofunk
    Participant
    @adofunk
    Join Date: 2003
    Post Count: 19

    Greetings forum members.

    Has been some time since my last post, however, I prefer to gain feedback on what I have done rather than what I aspire to do.

    A week ago, I placed a simple ad in the local newspaper’s real estate section, looking for people interested in Lease-Options, or “Rent-To-Buy”. It was the smallest and cheapest ad I could buy.

    Who would have guessed? You place an ad and people begin ringing you, looking for information! Thanks to Bruce Innocent and his Interview with Steve McKnight on the “Tales from the Trenches” pack for motivating me to actually do something.

    Anyway, I’ve since been putting together an introductory letter outlining the Lease-Option process. I decided that this forum would be a good place to test it out and gain some much-needed feedback.

    I’ve also compiled an Excel spreadsheet where I’ve been doing the numbers. It is here that I’ve found some problems. Namely, if the tenant (person taking up the lease-option) has 40% of their weekly rental payment amortized off the loan amount, how long will it take them to actually pay off the house? Is it the aim of the 25yr Lease-Option for the tenant to actually pay out the loan over the period, or just to build up equity, through repayments and capital gains, so they can then refinance through another lender?

    I think the latter. For example:

    Lease-Option price: 100K

    25 yr. Lease-Option: $100,000 / 25 = $4000 Principle Repayment per annum.

    Assume 8% I/R: $100,000 * 8% = $8000 First Year Interest Repayment.

    Therefore, total First Year repayment = $12000

    OR = $250 per week.

    Now this scenario will pay off the house over 25 years. However, if the amount of the weekly rent amortized (deducted) from the loan principle is 40%, then the loan will not be paid out in 25 years now will it?

    Is this the key difference between a Wrap and a Lease-Option? To own the house, the tenant will have to exercise their option to purchase, otherwise they will never own the home?

    If so, how do I include this in my introductory letter so as to be honest and up front, though at the same time make the deal sound as appealing as possible. I figure I’ll start by outlining the good points, then disclose the costs and conditions, then end by reiterating the benefits to the tenant.

    I welcome your feed back and will post my actual introductory letter as a reply to this initial post.

    Cheers, Adofunk.

    Profile photo of AdofunkAdofunk
    Participant
    @adofunk
    Join Date: 2003
    Post Count: 19


    Here’s my initial Tenant Information Letter…It’s not quite finished, though I’d appreciate any feedback.

    Skip this question if it bores you, though please scroll down to the Tenant Information Letter…

    Questions:

    1) If I link all Interest Rates to both prevaling rates, as well as the CPI, how does the latter affect repayments? I understand the impact of changing I/R’s, though am not so sure about the CPI. Say the CPI increases at approximately 3% p.a.this means that the cost of pretty much everything; goods, services etc. goes up in price though stays approximately even relative to each other. This increase in costs should be matched by a similar increase in wages, correct? Does this mean that since my income should increase in line with inflation, then I should pay more for my accommodation also?(In this case, my tenant paying for the Lease Option..)

    Greetings Mr ……,

    Thank you for you inquiry. This is our initial information brochure, which outlines our “Rent-to-Buy” offer. Hopefully you will find it informative and easy to understand. Obviously, each individual’s circumstances are unique, so questions may arise that aren’t addressed here. We will make a follow up phone call to discuss what you have read, though we welcome your call at any time to clarify any points of which you are uncertain.

    Our Offer

    Simply, we purchase a property, then lease it to you, the tenant, with an option to purchase the property at an agreed price some time in the future.

    If you decide to take up the option to purchase, a portion of your weekly rent is amortised, or deducted from the total amount. In this way, the tenant builds up equity in the property, however, this equity can only be realised upon your purchase of the property.

    Our service typically helps people who can’t obtain bank finance, and or do not have enough saved for a usual deposit.

    Benefits for the Tenant

    So what’s in it for you?

     Certainty. You can not be moved out as with a regular tenancy agreement. The only way you can lose the property is if you fail to pay your rent and break our agreement.

     You begin to build up equity in the home from day one. As soon as you make your first rental payment, you have taken a step towards owning the property.

     Capital gains. It is typical for property prices to appreciate over time. We fully expect your property to be worth far more in five years than it is today.

     Refinance. You, the tenant may decide to refinance the property through a different lender and thus take up your option to purchase the property. If you have been renting the property for five or ten years, then you will have paid off a certain amount of the loan. This can be shown to a lender as proof of your good character and commitment to owning the property. Capital appreciation may have resulted in the value of the property rising by some 20% to 30%, and as such your option to purchase price is much lower than the property’s real value. A lender may then decide that you have much greater equity in the property than simply the amount you have been paying off on a weekly basis. This will make refinancing that much easier.

     You, the tenant have the right to improve the property as you see fit. We are more than happy for you to spend money upgrading the property, if we are informed of what you plan to do.

    Benefits for Us.

     Certainty. We have a long-term tenant whom we know values the property. Indeed we don’t want tenants as such, we want homeowners. This is an important distinction. In a regular rental situation, tenants come and go. Tenants will also sometimes cause damage to the property, all of which costs us money. We much prefer win-win outcomes.

     We make money from the agreement in two ways. The first is through rental income. The second is through the difference between the price we pay for the property and the price we charge you the tenant for the property. This is an important point. We don’t like paying full price for a property. We employ all of our negotiating skills to achieve the cheapest price possible. We then split any discount between the tenant and us.

    Let me explain further. If for example the property we are interested in is valued at $150K. After much negotiation on our part, we purchase the property at $130K. We have made a saving of $20K, which we would divide between the tenant and us, meaning that we would take out a mortgage on the sum of $130K, though would sell it to the tenant for $140K.

    We consider this a win-win outcome. We have saved money, and so has the tenant. Just how much we make depends upon our negotiating skills.

    Example

    Andrew and Sally see our advertisement and decide that they want to “Rent-to-Buy”. They don’t have the usual 20% deposit saved for the home they want. Sally hasn’t been working long enough in her new job to demonstrate to the bank that she is a regular income earner. Andrew on the other hand has a steady source of income, though had defaulted on a car loan five years earlier, when he had bought his “dream-car”, only to find that he couldn’t afford the repayments. Unfortunately the car was repossessed and he has had trouble getting finance ever since.

    The couple has a dog, which previous landlords have looked at unfavorably. They are sick of renting and want to be able to make changes to their home as it suits them.

    After contacting us, reading and understanding the offer and successfully completing the application process, Andrew and Sally have decided to go ahead.

    They want to find a house, with two to three bedrooms, a back yard and a safe place to park the car. Access to public transport is important, since they only have one car between them. A close proximity to shops and other services is also important.

    Rent-To-Buy

    Advertised House Price $120,000.00
    Our Negotiated Price $100,000.00
    Lease-Option Price $110,000.00
    Our 1st Mortgage (80%) $80,000.00
    Deposit (20%) $20,000.00
    Our Interest Rate (I/R) 5%
    Tenant’s Interest Rate 7%

    Our Expenses

    Conveyancing & Legal Fees
    Insurance
    Building & Pest Inspection
    Stamp Duty

    Tenant’s Expenses

    Option Fee (Non-Refundable)
    2-3% of Total Property Price $2265.38 to $3765.38
    Two weeks rent up front $465.38

    Us

    25 yr. Loan Principle Repayment $80,000/ 25
    Per Annum (p.a.) $3,200.00
    Interest Repayment at 5%p.a. $4,000.00
    Total Annual Repayment $7,200.00
    Total Repayment per week $138.46

    Tenant

    25 yr Loan Principle Repayment $110,000/ 25
    Per Annum (p.a.) $4,400.00
    Interest Repayment at 7%p.a. $7,700.00
    Total Annual Repayment $12,100.00
    Total Repayment per week $232.69

    Important Points

     Initial costs for Tenant.

     Option fee. 2% to 3% of total property price. This fee contributes to our purchasing costs. It also constitutes a commitment by the tenant towards the property. The option fee is payable upon signing of the contract and is non-refundable.

     Two weeks rent up front.

     All Interest Rates are fixed against both prevailing national Interest Rates and against the Consumer Price Index (CPI). This means that if interest rates rise, as they periodically do, and our loan Interest Rate increases, then this increase will be passed onto the tenant to maintain our 2% spread. It is important that you understand this. We typically fix our interest rate with our lender for as long a period as possible so as to avoid an increase for either the tenant or us.

    Our interest rates are also fixed in line with the CPI. This is the national measure of inflation.

     If we are unable to negotiate a discounted price for the property, then we will implement the Lease-Option at the agreed purchase price, providing this is still affordable for the tenant. This simply means that the deal is a little more expensive for each of us.

     All running costs for the property are the responsibility of the tenant. These include; Council rates, land tax, utilities such as electricity, gas and water, strata fees if applicable and any repairs.

     The smaller our negotiated discount, the smaller our “spread”. If we pay the same for the house as the tenant, we earn money only on the 2% interest spread.

     In the example where we buy the house for $110,000 and lease-option it for the same amount, we make $4000 positive cash flow per annum, which equates to $100,000 over 25 years. If the tenant takes up the option to purchase at any stage prior to 25yrs, we earn less.

    Profile photo of AdofunkAdofunk
    Participant
    @adofunk
    Join Date: 2003
    Post Count: 19

    No one can be bothered reading this much text?[;)]

    Profile photo of neologismneologism
    Member
    @neologism
    Join Date: 2003
    Post Count: 91

    hehe i just did, would a person who rents really understand this tho? i also think its a little to honest for your own good, hide some of the facts a bit, no one likes to hear they are giving someone else $100,000 in intrest!! ontop of what they would normaly have to pay

    Profile photo of JetDollarsJetDollars
    Participant
    @jetdollars
    Join Date: 2003
    Post Count: 2,435

    Just finished reading it!

    Profile photo of MiniMogulMiniMogul
    Participant
    @minimogul
    Join Date: 2002
    Post Count: 1,414

    hi there,

    i think it’s great, but also I agree with Neologism. I mean – if you analyse any mortgage over 25 years you’d be paying a horrific amount of interest. But the average lease-option-ee might not know that and get a shock.

    cheers-
    Mini

    http://www.vocalbureau.com

    Profile photo of AdofunkAdofunk
    Participant
    @adofunk
    Join Date: 2003
    Post Count: 19

    I agree that I disclosed too much in my example, though my reason for doing so was more to show myself that I knew how it works. I have since changed the example to something more simple and posted out the letter to those who asked for it.

    Adrian.

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