Pat,

The quote marks on your post’s subject line will block all responses.

State laws vary greatly so seek wise legal counsel if you choose to proceed.

We ONLY do RTO on our single family homes. Only 2 out of 1,000 have purchased the home. Most drop out due to divorce, eviction, or moving out of town. We use it as a “hook” to grab their attention to increase the value of the lease.

Usually the folks who casually ask are hoping you will apply every penny of their payment to the purchase price. They are asking because their credit is terrible and they know there is no chance of getting a bank loan.

Brad20K,

Would you mind explaining (again) how you increase the value of the lease with RTO? I have sought counsel with my RE attorney on doing RTO and he thinks most RTO deals are nothing but scams (one party selling impossible dreams to another).

That being said, my attorney will does advocate a good well documented Owner-Finance deal where the Deed is held by the buyer and a foreclosure is required if there is a Default.

We did a 2 year. Tenant added 200.00 a month EXTRA toward down payment (non refundable) we gave matching 200.00 credit when sale consummated.

2400.00 X 2 years= extra from tenant = 4800.00 and same from us 4800.00. Deducted 9600.00 from sales price 24 months after original contract. Purchaser went through 5 lenders before finding one willing to do deal-- with tenants credit history. Tenant was promptly foreclosed on 5 months later by lender.

We've done (Roy sorry to get to long on this I know how you hate that) maybe 10 of these and all except 1 has come back to us-- since we now hold the notes-- the one still out there is going into foreclosure paper for the 4th time starting July.

Myob,

Forgot. Very important to have 2 contracts-- standard rental contract AND separate option paper showing how the option money is paid, if missed payment what happens and a drop dead date on purchase-- usual stuff.

Roy,

By "increase the value of the lease" tehre are two factors in play.

First, for the Seller/LL, there is almost zero chance of losing. The option fee is large ($2K-$5K), rents are above market and if tenant fails to fulfill the contract there is no refund of that extra amount, and you can evict vs. foreclosure. From a Seller/LL perspective, that's a big win.

Second, for the Buyer/Tenant, there is a PERCEIVED value of being able to be a homeowner. This is referred to as "The Dream." People will hand over a lot of money in exchange for a dream. But as you see from the stats, that dream hardly ever becomes reality.

Sid,

With RTO deals and a 'small or large down payment',..at what point can the tenant/buyer claim an 'Equitable Interest' in the property?

Thanks Brad, I did not know about quotation marks. The only sale we have done was to buy a property our tenant wanted, & financed it for him at 6% interest for 15 years. The lawyer held the signed deed, and the tenant signed a paper in the event he misses 2 payments. He has to pay taxes & insurance & keep the place up. We got no down payment except we paid less than what we financed it for.

It is a good deal if you have a history with payments (we did). Plus he took care of rental well while he rented a different property from us. We were going to lose him if we hadn't done it, he was going to keep hunting for a property of his own.

Ken,

Roy, that is a risk that others have mentioned. A judge can take an option contract and say, "I don't care what you call it: if it looks like a duck and quacks like a duck, it's a duck." So in Brad's words, you have to "know your judge."

That said, Option to Purchase contracts have long been recognized as valid instruments in the real estate world, so in and of themselves they are legit. I think where Sellers get into problems is when they try to tie the two deals together, making one contingent upon the other.

For example, let's say that in your Option contract you include this clause:

"For an option fee of $5000, Owner X agrees to give Potential Buyer Y the exclusive right purchase the property at 123 Anywhere Ave up until June 19th, 2021 for a price of $99,999. If Buyer Y defaults on the lease held at that property, however, this right is null and void and option fee shall not be refunded."

That last sentence puts a condition on the Option contract that "ties" it to successful performance of the lease. A judge might look on that and say, "Hey, what you were really doing is overcharging that tenant in their lease and so they have equity."

A BETTER way to do it would be this...

"Buyer Y must satisfy any money owed or other contractual obligation to Seller X before exercising the option to purchase."

That accomplishes two things: 1) there is no specific mention of any lease agreement and 2) it is open-ended to a variety of possibilities that would terminate the option contract rather than specifying violating the lease. Let's say the Buyer owed you $50 for a lawn mower you sold him and had signed a Promissory Note for that. That would void his option just as surely as if he broke the lease. By keeping the two transactions COMPLETELY separate, you reduce the chance that a judge will overrule your deal and say, "This in fact is what was really happening."

Roy, another thing worth mentioning--and please understand I am NOT accusing anyone who does RTO's of having evil purposes--for a tenant/buyer to prevail in court regarding their option fee, they'd have to pay an attorney and go to court. How many broke tenants/buyers will have the $2,000 - $3,000 retainer fee to hook an attorney's interest? These deals can be complex to unravel and take time to litigate. There may be a few Pro-Bono laywers who would take these cases, but my guess is that is rare.

Poor Tenants sometimes get access to free attorneys when they are named as defendants in an unlawful detainer cases, but I am not aware of any lawyers acting as free consultants for plaintiffs in RTO deals gone bad. So the Seller knows he most likely won't get sued, regardless of whether a judge would grant equity.

If you collect 50 RTO fees and only get sued and lose on 1 deal, you can pay out and still make a huge profit. It's a numbers game.

We've only done owner-finance twice in Texas-- both times as personal favors to someone we knew to keep them from losing the house they were already in the process of paying for from someone else. We bought them, allowed the people to stay, and allowed ourselves to be reimbursed. The first one, they were kicked out within 90 days, though if he had kept his nose clean, he could have had it paid off in less than two years. (Big convoluted dramallama story goes here.) The second one, he's been good for about a year, and has about five left.

In Texas, because RTO has been abused so much by people who don't want to sell a house, but want to sell a house over and over and over and over-- it's possible for someone who "does it wrong" to lose more than the value of the house in court. So if you don't have everything exactly correct--- if you don't know at what point their ownership interest kicks in-- you can be majorly penalized.

Roy Deed in Lieu of foreclosure keeps the foreclosure from #1 dragging out and # 2 getting to costly for Lien holder.

I've done all my foreclosures with this. The one going to foreclosure July may be a different story.

We agree -- if they vacate "immediately" and give us keys to accept the property AFTER we inspect inside. We explain as long as there's no fraud or underhand dealing we will take back with agreement not to "go after" any deficiencies. We had one with this type of agreement-- that was in shambles. The owner was crying in my office begging to take it back. So rather than wait we did take it and all signed the agreement and deeds. Got back 6 homes five of them with tenants- new roofs new HVAC's new carpeting. Perfect condition. 1 not so good.

About 3 weeks later my insurance man calls wanting to know about a claim made on the property for 10K and paid by his parent company. The check was cashed the same day the guy was crying in my office that he couldn't pay. I do mean in tears. (He probably had the check in his back pocket) So I called him and asked him about the payment and he kinda laughed-- well he laughed until I mentioned the signatures on the back of the check. HOW DID YOU GET MY SIGNATURE ON THAT CHECK? Yes, THAT'S RIGHT FOLKS THAT CHECK WAS PAY TO THE ORDER OF HIM, ME AND HIS PARTNER. BINGO

I don’t.

I bought a property off a guy in my area who did a lot of RTO. I wanted the lot. He offered to show me how it was done, and said he made a lot of extra $$$ off RTO.

Pat, you say you don’t want to do RTO, due to your age and what have you. Tell your tenants; “No”. Practice saying it in the mirror until you are comfortable with the word.

Pat, you say you don’t want to do RTO, due to your age and what have you. Tell your tenants; “No”. Practice saying it in the mirror until you are comfortable with the word.

Pat, you say you don’t want to do RTO, due to your age and what have you. Tell your tenants; “No”. Practice saying it in the mirror until you are comfortable with the word.

Pat, you say you don’t want to do RTO, due to your age and what have you. Tell your tenants; “No”. Practice saying it in the mirror until you are comfortable with the word.

Roy,

Nothing sleezy about it. I give folks an opportunity to move ahead when the banks won't even talk to them. I offer to help them clean their credit. I recommend they take Dave Ramsey's course and learn how to succeed financially. I even report their good payment history to the credit bureaus.

Here's the problem - life happens. They usually shoot themselves in the foot - for the same reasons they cannot get a bank loan.

If that person had bought a home thru the bank the bank would hit them with $5-10,000 in additional fees, smashed their credit, and taken back the home.

Me? We let them walk away if they choose. Most people want their freedom and are happy to walk away.

Yes, I re-rent quickly and start again with someone else.

NO ONE is harmed.

There are many versions of the generic term RTO.

Mine is simple: instead of a deposit they pay the same amount (+$1) to join the RTO program. They handle repairs for reduced rent.

(Note: a big company is MO charges a "Leasing Fee" rather than a deposit. No value for the res)

For those posters giving equity of ANY kind - double check Dodd-Frank and Securities&Exchange Commission rules. Granting any amount toward the purchase or offering seller financing can easily be considered making a loan. Need a license to do that.

Why RTO? It is a marketing hook to catch their attention and offer more than other LLs. The extra value is the opportunity to move ahead when the banks refuse to talk.

70% of folks cannot qualify for a bank loan but with proper screening they CAN qualify for out RTO program.

Our RTO gives them time IN THE HOME to pay off some debt, improve their credit, rack up time on the job, build a solid payment history...all the things the bank wants to see.

Check YOUR state law. Indiana law is very clear: an option fee is NOT a deposit and does not have to be refunded.

Don't impose your own values on other people. Find what they want, help them get it, and let them pay you for it.

BRAD

PS

The res can apply the Option Fee to their closing costs. Every penny.