How To Know a Rent To Own Homes Company is Credible? Part 2
Question 4: What is the monthly rent and what does it include?
There are two key components to the rent in a RTO deal. First, there is the cost portion of the house and that calculation should be based on the true cost of the house being purchased. Use an online calculator to figure out what your mortgage payment would be if you were to buy the house today. Most RTO clients give a down payment of 5%. If that’s the case for you, assume that you’re going to be borrowing 95% from the bank, use a term length equal to the RTO term, use a 25 year amortization (i.e. currently required by lenders for purchases where the down payment is less than 20%) and use an average interest rate. That will give you an idea of what the mortgage cost would be. If you’re being charged more than that, ask why. There shouldn’t be any mysterious numbers in the process. The cost portion also includes the property taxes and house insurance. Be sure to factor in average increases each year for both and average out the costs. The total of the mortgage plus the taxes and the insurance is the cost portion of the house. Second, there is the savings portion. Currently, lenders require a minimum down payment of 5% plus 1.5% for closing costs. The least you should be saving within the program is therefore 6.5% of the final purchase price. If the savings portion proposed to you is less than that, you may not have enough cash to do the deal at the end. In short, the monthly cost should include a cost portion that is understandable plus a savings portion based on real figures and the minimum requirements listed above.
Question 5: Is the documentation professional?
It might be OK to draft up a quick one-page agreement with a family member for a small personal loan but where real estate is concerned you want to ensure that all of the documentation is thorough and professional. Here are a few documents to look for:
1. Proof of deposit. Do you have a signed document confirming the amount you disbursed initially? There should be a paper trail for every step.
2. Lease Agreement. This document should outline the terms of your rental for the entire Rent to Own period.
3. Option to Purchase. This is the most important document of all. The Toronto Real Estate Association provides a generic, professional document that you can use as a starting point. Ask a Realtor to provide this form. Schedule A should outline all of the clauses that protect both the Tenant Buyers and the investors. Ensure that everything is listed in detail including the amount you gave as a deposit, the amount you’re saving on a monthly basis and any other conditions related to the purchase at the end of the Rent to Own term.
Once you have gone over all of the documents and you are satisfied that you understand them, have them reviewed by your lawyer. It is important to understand your rights and obligations within the RTO program. If you have any questions or concerns, ask for more information and clarification from the company. If your gut is telling you that something isn’t quite right, listen! Call another RTO company and find out what they offer. Compare notes and documents. Above all, ensure that all of your questions and concerns have been addressed.
Rent to Own can be a powerful, effective tool for families when it’s done properly. Like any other industry, there are companies doing it well and others who are setting up their clients and investors for a big fall. It pays to ask a lot of questions and to do your homework thoroughly. Insist on working with honest, reputable companies. They do exist.