Written by Jeff Trapp
Tenant screening is an important step toward all rental agreements, and doubly so for rent-to-own properties. The tenant is, after all, the exit strategy for the investor. So, finding that right tenant for this type of investment and maintaining a good relationship is key.
Recently, I have preferred to acquire the property first and then seek tenant buyers ( my mortgage broker assists with financial and affordability aspects while a lawyer makes sure my signed agreements with tenants and with investors are bulletproof).
Still, there are five things to consider when doing due diligence on tenant buyers?
• Recognize who makes a good rent-to-own candidate – some people are better tenants for this type of investment than others. Try to focus on people with damaged or no credit, newcomers to Canada who can’t qualify for traditional financing, those recently self-employed (within one year) or those with a good employment history. While they may seem risky in a traditional home tenancy situatlion, for this investment they are your bread and butter.
• Make sure the property is one that you could keep if the deal goes bad. Having multiple exit strategies for each property is never a bad idea, and although the end goal is for the tenant to buy the unit, anything can happen. Investing in a rent to own of a nice acreage 45 minutes from anyone may seem peaceful and serine, but if the tenants can't or doesn't use their option, you may be stuck with a property that’s hard to fill with conventional tenancy or even re-sell.
• Check references - financial, personal and professional - and be cautious when asking a current landlord for a reference. These are not necessarily the most unbiased and accurate testimonials. In any good rental application, there should be a sequential rental history that makes sense. You’ll find that many tenants applying for RTO that have an interest in becoming a homeowner and in a sense already “screened” themselves, as they have as vested an interest in this investment as you do.
• Make sure the buyers’ option-to-purchase price is agreed upon at the beginning of the term. You have to know your market! If you go in too low, you're giving up equity. If you go in too high, you could be shutting out the tenant (and your future buyers) out of the deal, leading to a vacancy and revenue loss. Don't be greedy!
• Communicate. You don't have to have your tenant buyers over for Sunday dinner, but set up communication plans and stick to them. Agree to inspect the property quarterly for upkeep, or agreed to improvements that they are under contract to make, and make sure they are continuing to repair and rebuild their credit worthiness. Stick to your guns.