A Letter of Calling for Rent-to-Own, Lease Option, and New Investors
Amansad Financial specializes in private and alternative lending we see a great degree of varying borrowers and lenders. Some Applicants may have excellent credit but simply do not meet a traditional lenders guidelines with respect to income verification, time on the job, or have not distanced themselves enough from a prior bankruptcy, consumer proposal, or other out of character credit mishap. Other times, it may be an applicant that has the income, the job stability, and down payment… however their credit is brutal. It could be caused from a variety of reasons, but I must tell you I have seen it all.
Private and Alternative Lending has always provided much more satisfaction when a real estate solution is provided that was not founded by a applicants bank, or their past broker. However there is one borrower is being neglected. This borrower has below average credit, above average income, and has the middle of the road down payment (10-15%). Can’t get a traditional mortgage & not enough for an equity based private mortgage. Now you may ask “How is it possible that one can save 10-15%, but is unable to get a bad credit mortgage?” It happens more often than not. Well, Amansad Financial Services currently has fair network of investors that will provide second mortgages to 90% LTV, however the borrower demand outweighs the supply of investors. Many of these investors are in the Rent-to-Own and Lease Option arena.
We have heard over and over again from various Investors that they are tapped out, and require a JV in order to make their Rent-to-Own / Lease Option deals fly. We have also received feedback that they may also be capped out on the number of rental investment properties they can hold; a very good problem to have. Another common vexation is the 25% or greater down payment that is being required.
Now if you are a RTO/LTO Investor, you will be ecstatic if the tenant buyer has 10% option consideration, satisfied if they have 5%, and may even consider if the tenant buyer has 3%. As for the predatory companies that do it for less I must say shame on you. The latter is a recipe for disaster.
Now what if you had the opportunity to invest in a second mortgage that potentially provided you with an annual return of 18-20%, while only investing 10 percent of the purchase price/appraised value. Would you consider it? Would you do it? What if the borrowers had an excellent exit strategy?
Let’s look at the simplified numbers. Numbers may vary depending on the structure of the LTO agreement.
$500,000 Purchase Price
$125,000 = Investor Down Payment
= $375,000 Mortgage @ 3% with a 30 year amortization
$1200 – Estimated Investor Legal Fees
$126,200 = Total Cash to Close for Investor
$25,000 Option Consideration from Tenant Buyer
36 month term w/ 3% appreciation
$4000 Estimated Annual property taxes
$1500 home insurance
Projected Overall Profit at 36 months = $96,206
(Assumes the home sells for the contract value)
Projected Profit is with a 50/50 JV = $48,103
How let’s assume the same $126,200 was invested in second mortgages at 16% -20% with borrowers that were investing 10-15% of their own money. Would this be a more secure investment? Well a simplified example would look like so:
2nd Mortgage Sample:
$126,200 x 16% = $20,192/yr. = $60,576 over 36 months
$126,200 x 17% = $21,454/yr. = $64,362 over 36 months
$126,200 x 18% = $22,716/yr. = $68,148 over 36 months
$126,200 x 19% = $23,978/yr. = $71,934 over 36 months
$126,200 x 20% = $25,240/yr. = $75,720 over 36 months
Note: The interest rate calculation above is based on interest only, compounded monthly
Both scenarios are lucrative, however Amansad Financial Services will agree that the 2nd mortgage is a better option for many reasons. The most obvious reasons are; there is no need for a JV, no landlord tenancy disputes, no mortgage insurer disputes, the return is not heavily weighted on property appreciation, and the mortgage applicant tends to be more qualified than the tenant buyer.
Both situations will have varying tax implication depending on how you invest and we suggest that you consult with an accountant. In addition, seeking Independent Legal Advice is recommended. Amansad Financial has many connected Lawyers that we can direct to you for some real estate law guidance.
Amansad Financial Services does not do any mortgage syndication, and we match one investor/lender with one property. You will always decide what works best for you. If you or anyone you know may be interested in investing in second mortgages, call 1-877-756-1119 or click HERE and complete the quick link investor form.