Rent to Own: What Comes First, the Tenant or the Property?

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When my husband Dave and I decided to make real estate investing our full time job, we had been investing together for seven years and had built up a multi-million dollar real estate portfolio. We were in a strong financial position for the long term but our short term cash needs were not being met by our properties alone.

To increase our monthly cash flow we turned our attention to doing more rent to own deals.

Rent to own rental properties provide higher rental income, lower expenses and typically attract better tenants.

And when you combine those benefits with the fact that bank financing had become a gigantic challenge for many people in Canada, the timing for us to move into this market on the West Coast of Canada was perfect.

To learn how to do rent to own deals in Canada we turned to Nick and Tom Karadza, a team of two investing brothers in Ontario, Canada that had been doing rent to owns for nearly a decade for themselves and their brokerage clients. And with some great coaching from them we quickly closed on our first rent to own deal, putting $7,500 in our bank before we even closed on the property and then adding $600 every month in positive cash flow every month after we took possession.

We had found our cash flow solution! We quickly adjusted our strategy to focus on buying one new rent to own deal a month for 2010. And, that’s what we’ve been doing.

Rent to own isn’t new to most folks reading this blog. But what might be new is the debate we’re finding amongst different rent to own companies in Canada (and now within ourselves) and that is:

What works best? Finding the tenant or finding the property first?

The Property First Rent to Own Strategy

Nick and Tom taught us the property first approach and it’s worked exceptionally well for us. Basically we buy homes in the starter family category for the market we are investing in and we only buy homes that are at or ideally, below, the average price of a home in that area. Then we advertise to find tenants for that property.

This gives us total control over the property we buy and the deal we make. It allows us to market to find the best deals in our target areas, like this gorgeous rancher with a market value of $350,000 that we’re going to close on next week. It’s in a super convenient location, it’s in such good condition you’d think it was brand new and we’re buying it for $330,000.

The tenant buyers that we hope will sign the lease this week will be agreeing to buy that home from us in 24 months for $378,000. And, in the meantime we will be pocketing over $400 per month in positive cash flow from the property.

It’s a great deal for us. And for the family that could not get financing because of a divorce that messed up their credit and tied up their assets it’s an even better deal because they can build up equity while waiting for their divorce to settle.

But this property has been a challenge for us to rent. We love this gorgeous, perfectly maintained and conveniently located rancher yet we’ve found that many prospective tenants weren’t interested. It was either too far from the specific school their kids attended or it was just too small for them (it’s 1333 square feet so this was a bit surprising to me, but we now understand that the majority of our market of tenant buyers are looking for 1500 square feet or more). As we struggled to find good qualified tenants to rent to own this property from us we started to wonder if author and real estate investor Mark Loeffler has it right with his tenant first approach.

The Tenant First Rent to Own Strategy

The tenant first strategy is simply marketing to find a tenant and then working with the tenant to find the property that they will rent to own from you. You pre-screen the tenants and even take a small deposit fee from them up front before you start house shopping. Then you have your tenant work with your realtor (who knows your criteria) and they pick their home. Then, you buy it.

This is different than how we’ve been doing it because we find and buy the properties and then find the tenants to place in them.

In his book Investing in Rent to Own Property Mark Loeffler explains that he prefers the tenant first strategy because when the tenants select their own house they are more emotionally invested in the home, there’s no risk of not finding tenants for the property you buy and the tenants are involved in the process from the start which reduces the expenses and stress many investors have to take on early on in the process to do rent to own deals.

There are plenty of benefits to this approach – especially the way Mark teaches it – because you qualify the tenant before you buy the property, you can ask for a higher deposit because they are selecting the property, and the tenants pay for and attends the property inspection. But, you lose quite a bit of control over the deal you’re making.

The Jury Is Still Out … But …

Now that we’re working on filling our fourth rent to own in 2010 we’ve found ourselves with three qualified applicants looking for specific homes. We have allowed ourselves to hit sort of a hybrid situation where we have taken applications from the tenants and we’re house shopping with them in mind. At the same time our tenants are out looking at houses too. They forward us any listings they like and we review them.

But here’s the challenge and the reason I don’t know if I like the tenant first approach:

We’re finding that depending on the tenants, some fall in love with properties that are out of their price range, in need of maintenance we don’t want to be responsible for, or are just not the kind of property we want to own if something happens and they aren’t able to buy it from us in the future. And … the biggest reason of all is that the tenant is involved in the purchase of the property reducing our ability to patiently wait for the best deals and find the best properties.

We just had an offer accepted on a property on Monday that is market value. We’re paying market value for an investment property and the only reason we’re doing that is because we have a line up of tenant buyers that will jump at the opportunity to rent this property from us. The high demand is a very good thing. We’re going to be able to cherry pick the best tenants for this property and command the best rent rates. But, we’re buying a property we wouldn’t have otherwise purchased for the simple reason that we have tenants pestering the heck out of us to find them properties in this area.

I don’t want to lose a month’s rent if we buy a property we can’t fill, but I think it’s much worse to find yourself rushing to buy a property at market value that you don’t really want to buy just because you have a tenant you like that really wants that home.

Now, this particular home is a good one. And it’s not that we don’t really want to buy it, but it is at market price and we’ve been really enjoying the profit margin involved with working hard to find the deals that are under market value.

I find it very tough to tell someone that has already started decorating their daughter’s room in their mind that I won’t buy that house for them. Even if the reason is legitimate like I am concerned about the water issues or it’s overpriced. It’s still not something I enjoy. I guess I just want to make people happy not let them down. And one of the hardest things we find with the tenant first strategy is explaining to someone why they can’t live where they want to live because there is no way they will be able to buy that home from us in a year or two given their current income levels.  When they are out shopping at houses it seems they lose track of the fact that they can only afford a $300,000 home when they see how gorgeous the $365,000 one is.

I’m grateful we have built up such a big database of people interested in working with us, but I would rather them fall in love with a house I have to offer than a home I never intend to buy.

So I like the tenant first approach for a lot of reasons but I think we’re going to stick with the property first – the only thing is I now know EXACTLY what streets to buy on and the minimum size of home I need to buy – and when I do that I know I can fill the property with only a few phone calls. The folks in my new target area can look forward to finding magnets on their mailboxes, letters in the mail, flyers in their papers and business cards in their coffee shop saying “WE WANT TO BUY YOUR HOUSE”. When a great deal in that area comes up we’re jumping on it because we are still doing the property first approach but now we have a line up of tenants ready to take them too.

Photos:© Andres Rodriguez | Dreamstime.com, Julie Broad

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About Author

Buy and hold real estate investing in Canada since 2001, Julie Broad is now a full time real estate investor and investing educator.

41 Comments

  1. The tenant first strategy is an interesting twist and one that I haven’t tried. While I like the idea of the emotional investment on the part of the new (prospective) tenant/owner, I can’t help but think of my number one rule for buying real estate, which is, make money when you buy the property. Finding the deal is always my focus. So, I would have to agree with you and your decision to stick with “the property first” approach.

    Thanks for a thought provoking post Julie. And, best wishes with the rent to owns!

    • Thanks for your comment Theresa! The tenant first strategy is not something I really knew too much about until I read the book I mentioned in the post by Mark Loeffler. What I am finding is that we actually get a lot of pressure from would be tenant buyers to do the tenant first approach. Once they decide they like our program and what we’re offering they push us to let us let them pick out their home. And there is comfort in knowing somebody is going to rent that home from you … but I prefer to be in control of my deals like you said!!
      .-= Julie Broad´s last blog ..Real Estate Investors: You Don’t Need a Homerun to Win =-.

  2. GREAT article Julie – and quite timely! I was just on a webinar Monday on this very topic and the presenter was opining that sandwich lease options were the “current thing” due to the current state of financing for SFRs. Lease options and Rent to Owns have long been my favorite investing strategy. I’m like you and use a combination of both strategies. Both work, and work quite well :-)

  3. Another great post Julie!
    Very encouraging that in a high priced housing market, you can still find deals that cash flow nicely. I’m with you on the property first approach.

  4. Julie, this was a very interesting post….like Theresa I never thought about a tenant first approach when it comes to securing lease option properties. If you have a database of people who are eager to work with you and enough of them are interested in specific areas, seems to me that its still ok to be patient and ensure that you have a solid deal before proceeding. The good news is that you essentially have some market data on what people want.
    .-= Shae Bynes´s last blog ..The Greatest Salesman in the World (Book Review) =-.

    • Thanks Shae!! Yep – we’re actually in a very awesome situation!! And the home we’re now buying that is market value is a really gorgeous home. I wouldn’t have bought it normally because I like to find the great deals but honestly I don’t regret buying this one at full price. We haven’t even lifted conditions on it and we have 3 good qualified rent to own tenants that will jump on it. And now we know EXACTLY where to focus our marketing efforts for the next few months.

      There are actually a lot of interesting positives to tenant first though – I will write a post about Mark’s book soon as it’s pretty slick. I just think I am a property first kinda gal. Aka a control freak. :)

      Thanks for your comments!! Love hearing your thoughts.
      .-= Julie Broad´s last blog ..Real Estate Investors: You Don’t Need a Homerun to Win =-.

  5. Nice article, Julie! It’s interesting to read both approaches – both have pros and cons.

    For me, I focus on the areas I feel comfortable with. Then, I test market to make sure there is a demand for those with a “homeowner type” mentality since that is what I focus on. I guess, it’s kind of a hybrid of both approaches.

    It’s great that you have a database of people lined up already for some of the areas you’re working. I think that is where some investors can get stuck. They buy the property yet do not have a renter and/or buyer lined up already for the home – it can be quite stressful. You’re smart to already have your buyers and/or renters lined up.

    I enjoyed reading your article, thanks for sharing!

    p.s. By the way, great title for the article – it really caught my eye!

      • Sure Julie, I enjoy reading your articles!

        Regarding test marketing, I’m more of an “in the trenches” kind of gal. Basically, I market (i.e. signs, flyers, etc) in the areas I’d like to focus.

        For the signs, they’re handwritten (me and Steph refer to them as “ghetto signs”) but they generate a lot of traffic. And, yes there can be sign police – it’s best to check with the laws regarding signs in the area. The best time (in my experience) for them would be before the weekend starts (Friday afternoons) and then taking them down before the week begins (Sunday afternoon). Usually, I like to put them near the “Garage Sale” signs.

        I’ve actually visited a couple garage sales in the neighborhoods I’d like to target – I talk to the people there and hand them my flyer on upcoming opportunities (i.e. my test market materials) for homes in the area. Then, I ask if they know anyone looking – usually a friend and/or family member. They take my flyer and I get a few calls from them.

        Also, if you can find any signs/flyers of apartment complexes advertising in the area you’re targeting (usually on the street corners for signs and local business bulletin boards for flyers) it’s a good place (in my experience) for test marketing as well – I put them side by side. If a prospective tenant and/or tenant buyer sees both, I find they call me too just for more info.

        In the beginning stages of test marketing, I like to take all my calls personally. I find it’s best so that I can get a sense of the types of people who are looking, what they’re looking for, how much they can afford per month and put down, etc. It’s really a good exercise to use.

        Some investors have told me they’ve had a lot of success finding buyers through craigslist. Though, I haven’t had much luck with it. In my experience, most people on there are just “lookie loos.” I think the most serious buyers are the ones who are actually actively looking and take the time to drive the neighborhoods they’re interested in.

        Some of the things I do many investors won’t do (i.e. such as attending garage sales, putting out signs, flyers, etc) – some think it’s a better use of time to advertise online/offline. And then there are those who think these tactics are a bit “ghetto” and beneath them – I guess it’s all a matter of personality and comfort level.

        Though, my “in the trenches” approach has worked for me and I find it a much better use of my time than putting $ into advertising and waiting for the phone to ring. Personally, I just don’t like to wait for things to happen and prefer to be more active.

        I hope this helps, looking forward to your next article!

        • WOW Rachel!! You shared some really FANTASTIC ideas!! Seriously … I expected you to say you put up Ads online (cuz that is what I do to test the market!!). You really blew me away. This is really high quality stuff!! Thank you so much for your great contribution. The garage sale idea is a really good one. I had never thought of that … and I might just try that this Sunday for the place I mentioned above … because right now we didn’t actually get the tenant to sign … so that beautiful rancher is still looking for it’s future home owner.
          .-= Julie Broad´s last blog ..Real Estate Investors: You Don’t Need a Homerun to Win =-.

        • Awesome value Rachel. Test marketing is so crucial for any business. It’s my favorite. You’d be surprised which ads pull better verus the ones that don’t. Offline advertising is definitely still the way to go. I just made some ghetto signs the other day. Craigslist is a pain but still gets a lot of traffic. If I could find someone better than them, I’d do it in a heartbeat! Consistency is key with classified advertising though.
          .-= J. Lamar Ferren´s last blog ..[ASK JL- VIDEO] Real Estate Bird dogs: When You’ll Get Paid on Shortsales and Finding More Investors to Bird dog for =-.

        • Sure, no problem Julie! I’m glad this has helped. In all honesty, I’d say 99% of my business is spent offline. Most of the work involved is usually field work, I practically live in my car!

          Thanks everyone for your comments, glad to help!

          p.s. By the way, I saw a special the other night about the owners (husband and wife) of the 99 cents store – they are worth over $600 million. (Not so “ghetto” anymore, eh Shae? :) It was interesting as this couple has continued to live the same lifestyle, very frugal for the last 20 years. In the special, they said they have everything they need – they look like regular, typical people. Not at all “glamorous” or how people think the rich are portrayed. Very interesting!

  6. Excellent Post, and timely for today’s market! Finding the buyer or property first has always been a catch 22 when doing L/O-rent to own! Since you are purchasing the property it makes more sense to find the property first! However, one thing I learned a long time ago via my mentor and has never failed me is; Know who your Buyer is first-before you buy!! That statement holds true for any purchase or strategy you may use. For me, since I prefer Controlling the property rather than owning it-I always find the buyer first!
    .-= Dwight (Matt) Mathews´s last blog ..The Next Great Recession 2011-2012?? =-.

    • Thanks Dwight!! Sounds like you have a great mentor!! Because I know the market extremely well now and what the tenants are demanding I am ok with the property we’re buying at market value just because I know that I have 3 tenants ready and waiting for it even if the one that wanted us to buy it falls through at the last minute. It’s going to make us good money and it’s going to be an easier deal for us because of the tenants waiting for it … but we’re going back to our patient approach to deal finding. I like my profit margin fatter even if it means a bit more work. :)

      I think that is where a new investor could get stuck with the tenant first approach – not knowing the market demand well enough. You might find a great tenant that wants a property out in the middle of nowhere or that is super specific to their needs and then … if they don’t buy it … what will you do with it?!!

      Thanks for your comment!! I appreciate hearing your view point.
      .-= Julie Broad´s last blog ..Real Estate Investors: You Don’t Need a Homerun to Win =-.

  7. Julie,

    What is the best way you found for finding your rent-to-own tenants?

    Ive been using craigslist/kijiji with mediocre results. There seems like there is a lot of competition on these websites.

    Thanks,

    Luke

    • Hey Luke –
      The 2 best sources we’ve found this year are Kijiji and a sign on the lawn out front of the property. For the market we’re in the Kijiji listing actually stays on page 1 for a 24 – 36 hours so I find that it works quite well. Plus I test subject lines. Some perform 3x’s better than others. The best one for us in this particular market is ANY subject line that includes PET FRIENDLY. The reality is very few rentals allow pets so pet owners are always look for alternatives. Even with a seriously ugly picture if the subject line says Pet Friendly it still gets better results.

      I think every market is going to be different. I can tell you without a doubt the worst place I’ve advertised is in the paper. 0 leads and $300 down the toilet to learn that lesson. But I know some folks that still use the paper in different markets with great results so you just have to keep testing options I guess.
      Julie
      .-= Julie Broad´s last blog ..Real Estate Investors: You Don’t Need a Homerun to Win =-.

  8. Pingback: Must See Posts: Yellow Letters, A Big Check and 3 Words | Struggling to Get Started

  9. I just wanted to thank everyone that commented on this post!! I really love it when the comments become even more useful and valuable than the post itself! Thank you for your thoughtful and helpful contributions.

    I also wanted to add something Tom Karadza (mentioned him in the post) said to me recently about the two strategies:
    —–
    Here’s the distinction we make, because we like both strategies….for first time investors they can get themselves in a lot of tough situations if they buy property that isn’t in the right area and isn’t at the right price point. What looks good to them today and looks like easy cash flow with no work or hassles may be a nightmare when that tenant leaves a year later … because no matter how emotionally attached a tenant is to a home – a job loss or family situation can make them hate that very same property. Some beginners mistakenly believe the tenant will buy out 100% of the time….that’s not correct obviously. And then the beginner investor is stuck trying to fill a property that may not be easy to cash flow and they become the motivated seller they were once looking for!
    —-

    I thought that was a great point worth adding to this post.
    Happy Weekend Everyone.
    .-= Julie Broad´s last blog ..Real Estate Investors: You Don’t Need a Homerun to Win =-.

  10. Awesome article Julie! I’ve often pondered about this question as well. Which is better…Tenant First or Property First. Although I don’t actually purchase the home myself, I do help the tenant find the property. As long as they pass my pre screening, it’s like walking around with your check already in hand. All you have to do is find them a property. With that said I have them help me out too. I tell them that they know what they want better than me, so if they come across a property they really like, send me the details or call me, and I’ll talk to the home owner, explain to them how renting to own works, negotiate, etc…

    On the flip side, finding the property first has worked wonders as well. It’s how I got my first deal. Get the home under contract and go out there and find the right tenant buyer. As you’re marketing you’ll get people that don’t want that home, but may want another. Now you’re building a list of potential buyers while still looking for the one that will lease the current home you have available. Therefore, when you get another property under contract, you have a list of buyers you can send the property too and may be able to get it sold quicker.
    .-= J. Lamar Ferren´s last blog ..[ASK JL- VIDEO] Real Estate Bird dogs: When You’ll Get Paid on Shortsales and Finding More Investors to Bird dog for =-.

  11. Hi Julie,

    I think the one complements the other as you will always have both options available. Such as when we have a vacancy we need to fill the property so we obviously employ the property first strategy. As for tenant first we are able to complete a lot more volume so instead of doing a house a month we can do 2 – 3 properties per week. The thing we like about tenant first is we typically see a higher uptake rate at the end of the term we are seeing 75% of our tenants completing at the end of the term.

    I would say if you have extra qualified tenants we are always looking for more so we should talk.

    • Thanks for your comment Mark!! Your book is a fantastic read – full of valuable insights – and it’s really what got me thinking about this whole debate in the first place. So thank you for that!

      I think my conclusion (and most of everyone else here) is there are good reasons to use both approaches. Maybe it is kind of like debating what comes first the chicken or the egg??

      We’re really struggling to make the purchases nice and profitable for our JV partners when we buy off MLS. We pretty much end up paying market price when the tenant is involved and that cuts our profit down. Instead of being able to offer our JV partners 20 – 25% per year return we’re down to 15 – 18% on the off MLS properties. For us, it’s less work because the tenant is right there ready and waiting and they do a lot of the property shopping for us but the JV partner isn’t getting as much upside. That isn’t to say there aren’t people out there that are thrilled to make 15% per year on their money … BUT … we prefer to offer 20%. That is really my main challenge with tenant first. I know you have figured all this out because the deals I’ve seen you post look very good in terms of the returns for your partners.

      I do like having the qualified tenants in mind when we’re marketing to find the deals and working hard to find the most in demand types of properties … the ones that I know I have a qualified tenant waiting for. They aren’t involved in the process directly but we’re consulting with them as we put offers in on homes to see if the home fits their criteria. By doing it this way we lose out on the advantages of your approach where the tenants cover a lot of the home shopping costs (like inspections) but we’re also able to uncover better deals with more profit.

      Anyway – thanks again for your comment!! I do appreciate it. I do recommend everyone pick up a copy of your book to learn more about the tenant first approach.
      .-= Julie Broad´s last blog ..Making Money with US Foreclosures =-.

  12. Great Article Julie,
    Let me tell you my opinion on both strategies. Tenant first strategy makes a lot of sense, when you have cash or money partner available on the side. You can very well use this strategy to attract JV partners and explain your exit and ROI effortlessly. Since your buyers will be lined-up there is almost no risk to your JV-Partner (I guess it is better than Stock Market).
    On the other hand, with property first strategy you must have unique marketing skills to find good deals on the market. While it pays more compare to “tenant first”, it might give you some discomfort with your exit.
    I am in favor of a little bit of both. If you have a lot of tenant/buyers lined-up, you will be more comfortable to look other deals.
    Cheers,
    Mehmet

    • Mehmet,
      What a simple and clear way to explain each approach and it’s advantages! Thank you!! I completely agree … especially with regards to JV partners. One of the things all our JV partners ask us when we’re signing them up for a deal is “Do you have tenants lined up for this?”. Usually we don’t have tenants firmly in place but have pretty good evidence or are fare enough along in the process to give them assurance but you’re right … having a tenant in place first would give the JV partner a TON of comfort. GREAT point!! Thank you for your comment!
      .-= Julie Broad´s last blog ..Making Money with US Foreclosures =-.

  13. Hi Julie,
    Great article! And even though I am your husband and investing partner, you continue to amaze me with great insight into what we do!

    To add my two bits – I really do like both approaches – however, my favourite really is the Property First approach if for no other reason than we are “real estate investors” not “tenant-buyer investors”. Simply put, we love buying houses, but more importantly we love creating deals and focusing in particular areas where we see great upside potential (in terms of growth, demand, and appreciation) and then snatching up properties in those areas. We can really only truly do this with the property first approach. As I said, we invest in properties, not necessarily people. I hope this makes sense!

    This is why Julie does most of our writing – she’s so much better at getting our point across!

    Great job Julie! : )

    • Hi Dave and Julie,

      This is a great discussion going here and I’m sorry I got in so late!

      Just to clarify. Is it not true that, all things being equal, the return on the investment, whether it is tenant first or house first, should be roughly the same, assuming the tenant executes the buy-option. The difference being the risk level involved.

      In the tenant first strategy, you may be stuck holding a property that is at or above market value if the deal does not close properly (ie, tenant does not excercise the buy option). With house first, the risk is up front, as you have to sit on the property until you find a tenant-buyer, which can cause some sleepless nights! Again, the tenant may not purchase the property, but in this scenario, you likely have a home that was purchased for below-market (assuming you found a good deal) and can be sold for a quick profit.

      Again, it is tough to compare the two as they are so similar. I suppose it comes down to how well you have done your due dilligence!

      Let me know your thoughts on this!

      A.A.

      • Hi Andrew –
        Regarding your question: “Just to clarify. Is it not true that, all things being equal, the return on the investment, whether it is tenant first or house first, should be roughly the same, assuming the tenant executes the buy-option. The difference being the risk level involved. ”

        The return DOES differ depending on how much below the market value you are able to purchase the home for IF you are doing a house first strategy. When you do tenant first they know what you are purchasing the home for so your starting price for them is basically the price you paid. When you purchase the property yourself and get it for under it’s market value your starting price IS the market value. That means an instant $20,000 or $30,000 in additional profit when you close on the property. That amount increases your return by quite a bit.

        That also reduces your risk a bit too … the less you pay the more options you have for alternative exit strategies.

        To me the main risk with property first- when you buy great properties in high demand areas – is you have a vacancy for a month or two. This can be scary but most of the time we don’t have to worry about it because we buy where people are HUNGRY to live. That way we reduce our risks up front and in the future if the tenant doesn’t buy.

        Hope that makes sense.

        Thanks for your comment – you’re never too late to the party to participate – we always monitor the blog comments!!

        Cheers,
        Julie

        • Thanks Julie,

          I was under the impression that with the house-first strategy, the sale price was based on a certain % increase over the intial purchase price – which is obviously not the case!

          For your rent-to-own deals, are you setting the price based on fair market value at the time of sale? Or fair market value at the time of purchase plus an additional % increase per year? Or if it is neither of these, let me know!

          Andrew

          PS Thanks for repsonding so quickly! I am a big fan of your articles in CRE Magazine and the Rev N You website that Dave and yourself maintain. I have just read Mark Loeffler’s book and am looking forward to more reviews/opinions!

          Hopefully I will be able to attend the Investor Forum this March as I live and work in Toronto!

  14. Hi Julie!
    Great article. My husband and I have recently turned to real estate investing to “thicken our wallets”. Through a friend we discovered a group of very credible and successful gentlemen who run a land development company in Alberta. I wanted to share this with everyone because sometimes we want to invest but have no clue where to start! Thats where I was at. My husband and I have since invested in several land projects and have reaped the benefits in a huge way. The development company who advises us is amazing and has helped direct a lot of money into our pockets. Sums we never knew we would ever see. Real estate investment is an amazing business and especially in Alberta with their booming economy and oil reserves. They barely felt the recession! If anyone wants more information on this feel free to email me. Best discovery ever made!!!!
    Reena

  15. Hi Reena,
    Thanks for checking out my article. I am very happy you’ve done well with land development. In this market there have been so many developers taking a really big hit. In fact I am in Medicine Hat right now where Medican – a very big Medicine Hat company with projects in many places in Canada and the world – is in serious financial trouble. It’s not an easy business to make money in so I am happy to hear you’ve done very well!!
    Thanks,
    Julie

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    • Hi Matt,

      As Julie’s husband and investing partner, I thought I would take a stab at answering your question about sandwich leases.

      Just to confirm we are on the same page, a sandwich lease in my experience/opinion is when there is a middle man who does a Lease Option (or Lease/Rent to Own) on a property with the Owner and then concurrently, does a Lease Option with a Tenant. Thus, the middle man is between the Owner (on title/deed) and the end Tenant (or Tenant-Buyer if you will). The intention is to relieve the Owner of the costs/time/effort required in owning the property (yet they can’t or don’t want to sell it) and effectively make some money by placing a Tenant in the property that the middle man will manage.

      The Owner gets some relief, the middle man (who is doing the sandwich lease) earns some money by charging the Tenant higher rent than what the middle man has to pay the Owner in rent, AND the middle man collects a higher down payment (or Lease Option fee) from the Tenant-Buyer than what he pays the Owner.

      Owner
      Middle Man – the middle man is in between the two parties
      Tenant-Buyer

      Without getting into even greater detail, that is how a sandwich lease works.

      So, to answer your question Matt, in a nutshell, at least here in Canada, they are a tough sell (to the Owner). I imagine they would be easier to do in the U.S. given all the foreclosures and bankruptcies, however, in a fairly stable and strong housing market, it is difficult to get the Owner/Seller to agree to “give up control” of their property even though it may save them from either losing some money on the house or even worse, losing their house completely.

      We know many creative real estate investors here in Canada and very few have successfully done Sandwich Leases on a regular, consistent basis. The biggest challenge is clearly explaining how the Lease Option works to a prospective Seller. As they say – a confused mind says “no”! And that’s our experience to date. We have personally tried to do sandwich leases on over 10 different deals and not one has panned out. Of course, maybe it’s because we have not been clear and concise enough in our negotiations with Owners/Sellers.

      I imagine where there are more motivated Sellers, a sandwich lease would be much easier to accomplish. But here in most parts of Canada, there simply are not a lot of motivated Sellers – yes, it’s a big generalization, but that’s what we are seeing and hearing.

      Cheers,
      Dave

      • Great answer Dave!!
        To me – the second hardest part in Canada with a Sandwich lease is then making the cashflow numbers work once a seller agrees to it!! :)

        If you’re in the US and looking for advice on Sandwich leases my friend (and tax expert) Bill Walston does a lot of them. He has great advice for anyone doing them. You can reach him through his blog at: http://www.billonbusiness.net/

        Cheers,
        Julie

  17. Hey Andrew – sorry to respond so low down the posts but it wouldn’t let me reply again!
    Thanks for the compliments about our website. If you do come to the forum in March please do say hello! I am glad you read Mark’s book – I was about to recommend it in case you hadn’t seen my comment about it above.

    Now to your question: For your rent-to-own deals, are you setting the price based on fair market value at the time of sale? Or fair market value at the time of purchase plus an additional % increase per year? Or if it is neither of these, let me know!

    We set the price based on today’s fair market value plus annual appreciation – which we generally put at 3-5% per year. What we paid is not relevant to the tenant buyer because we don’t openly talk about what we paid for the place – we focus on what it’s worth today. We will support today’s value with an appraisal and market comparables if questioned on it but usually people just look at what we’re asking for the place in the future and determine if that is comfortable/affordable.

    Hopefully that makes sense. There’s obviously a lot to this but generally speaking that’s how it works.

    Hope to meet you in March,
    Julie

  18. Great article Julie! I went through this same experiment about a year ago and came to the same conclusion as you. There is too much money left on the table if you aren’t controlling the property purchase.

    I do have a question regarding your financing that I hope you can clarify. You mentioned that you started doing rent to own to help with short term cash flow, but doesn’t the buy still eat up more cash than the intial option fee provides? For my deals, it’s 20% down plus closing costs and the option fee is generally 3%, so it isn’t coming close to covering the down payment. It’s better than renting, but still a negative cash flow in the short term. Is this similar to what you’re doing?

    Also, do you have any concern whether your buyers will qualify for a mortgage at the end of the contract term? I’ve read that as many as 90% of rent to own buyers do not actually end up qualifying for a mortgage at the end of the term. If that happens you’ll be happy that you controlled the property purchase and got a below market deal.

    Is there any concern that the property would not appraise for your buyers to get financing? You mentioned a deal where the market value is $350k, but the rent to own sale price is $378k. Do you expect the the appraised value to be at $378k by the end of the contract?

    -Jaden

    • Hi Jaden,
      You have a lot of great questions. To properly answer them it would take quite a while but I will give you simple answers, ok?

      1. I am not sure what you mean about covering the downpayment/negative cash flow. After all expenses our properties generally are positive cash flow by $500 – $800 a month. The initial investment costs are not covered by the tenants deposit. We have JV partners who put up the initial investment capital and they earn a great return on that investment and get their money back when the tenant buys.

      2. KNOCKING ON WOOD – we have a 100% success rate so far. We are exceptional stringent with tenant screening and proactive during the process to help ensure they are doing what they need to do to qualify. I don’t believe we will maintain our 100% success rate forever but I do believe that we take extra measures to screen and educate and will always have a higher than average success rate because of it.

      3. Yes that is a concern in a slow and flat market for sure. We try to buy under market and price as conservatively as will make sense for our returns. We can never buy AT market value for this reason or we’d have to price it too high.

      Cheers,
      Julie

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