Tenant future purchase?

Dolby

Dolby

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Just been to my tenant and they suggested something.

Currently they pay R8,500.00pment - of this I pay R500.00 management fee to an agent and R700.00 rates and taxed ... which means I get R7,300.00 out of the deal.

Now the tenant wants to rather pay R10,000.00pm - and they pay all maintenance, rates etc as if they owned the house currently - but have an agreement to purchase the house in 5 years at an increased price. For example the house is worth R1.3m now and R1.9m in 5 years.

They will then take off what they have paid to date R10,000 x 60 (R600,000.00) - thereby paying R1.3m in 5 years.

Sound dodgy?

* PS I didn't escalate rent for this example.
 
Dolby said:
Just been to my tenant and they suggested something.

Currently they pay R8,500.00pment - of this I pay R500.00 management fee to an agent and R700.00 rates and taxed ... which means I get R7,300.00 out of the deal.

Now the tenant wants to rather pay R10,000.00pm - and they pay all maintenance, rates etc as if they owned the house currently - but have an agreement to purchase the house in 5 years at an increased price. For example the house is worth R1.3m now and R1.9m in 5 years.

They will then take off what they have paid to date R10,000 x 60 (R600,000.00) - thereby paying R1.3m in 5 years.

Sound dodgy?

* PS I didn't escalate rent for this example.
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sounds ok IF you have evertything down in a legally binding agreement/purchase document/whateeveryoucallit
 
Hmm, you loose out on this then. What should be reasonable is for them to claim the amount of difference between 10k and 7k3. Thus 2k7 x 60 (R162 000), which isn't correct either. You should work out the future value of each of the payments...
 
R10,000 - R7300 = R2700. R2700 X 60 = R162,000.Which is the cash that you are giving up if you do nothing (excluding annual increases as you mention). Then there is a growth on the property value.

So... If the place is R1,3m now and R1,9m in 5 years then they pay R1,9m less the R600k which is R1,3.
Add R1,3 and R126k and you get R1,462,000 for a R1,9m house. R438000 difference ... but you do have the R600k in rent they paid.

Lots of other factors like increases in rent and property values and running costs over the years to consider.
It also assumes it will be worth R1,9m in 5 years - As long as it stays below R1,462k you are losing (I think).

For me I would not be happy with the risk. Can they buy it in 5 years? What if they default? What if you want to sell sooner? I'd say offer them right of first refusal if you decide to sell and/or let them make an offer when they are able to.

If they can afford R10k per month they should look for a deal on a house of their own. Plenty of desperate sellers out there at the moment and if they are looking to make an offer in 5 years it means they have a plan to save up the deposit or something like that. So they probably have more than R10k a month available.
 
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What happens if they decide not to purchase in 5 years?
 
Everything would be legally done and worked out. The gave me rough figuresd a few hours ago (they'd be looking at this in about 9 months - so time to work out).

Nick - they said we'd need to determine the value of the house in 5 years, if I understand corrently. That parts a gamble though. as the property could drop (slow down) again or increase dramatically. So either could win/lose ... and I have no idea how they'd work out the value then.

But I do feel I'm being screwed somehow ....
 
Nick333 said:
What happens if they decide not to purchase in 5 years?
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That what's the agreement now would be for, from what I understand :

I HAVE to sell and they HAVE to buy.
 
If you do it this way you forfeit all the rent for the next 5 years..

Basically what you described is them paying off the first R600 000 of the place over 5 years, thereafter they settle the outstanding amount. What about occupational rent then?

Doing it this way you will only be earning whatever capital gains there is on the market value of the house, you wont be receiving rent...

Just my 2c...
 
If I add in the escelation, over 5 years they would have paid R732,000 - which would come off the guessed R1.9m - leaving me with R1.167,000.00 in 2015. Not that much :/

PS assumed the R1.9m by a 10% escalation too ...
 
Boomstomp said:
If you do it this way you forfeit all the rent for the next 5 years..

Basically what you described is them paying off the first R600 000 of the place over 5 years, thereafter they settle the outstanding amount. What about occupational rent then?

Doing it this way you will only be earning whatever capital gains there is on the market value of the house, you wont be receiving rent...

Just my 2c...
Click to expand...

Ah.

So that's how I'm getting screwed ;) I can see the figures look pretty ****ty, just wondering how/why (I'm not a financial person)
 
Dolby said:
Everything would be legally done and worked out.
Click to expand...

I'd make them pay the legal fees and get this checked over by some kind of expert - property law or accountant?

Dolby said:
But I do feel I'm being screwed somehow ....
Click to expand...

My gut feel too. My maths above is probably completely wrong but I still think the seller looses in this deal.
 
Boomstomp said:
If you do it this way you forfeit all the rent for the next 5 years..

Basically what you described is them paying off the first R600 000 of the place over 5 years, thereafter they settle the outstanding amount. What about occupational rent then?

Doing it this way you will only be earning whatever capital gains there is on the market value of the house, you wont be receiving rent...

Just my 2c...
Click to expand...

Kinda ... You have the R600k and the interest and ability to use that. You also have zero maintenance cost for the place so you need to add that to the value but they whole refund the R600k vibe means you pay back the rent they paid over the 5 years.

My view - all to complex.
 
You are trying to do several things..

1: Cut the agent out of their cut, not that bad but just cover your bases, they might nail you.
2: Set up the sale of your house, also good but its a risk for both parties.

Make sure you agree on an exit strategy. If they can't buy the house in 5 years then will you keep the extra money ? Also remember that if the house is still in your name you need to make sure that they pay the rates and taxes, or else you will get nailed for.

It might work out well for you as you will save interest and you will have a buyer lined up in 5 years BUT what if the house is worth more than 1,9 in 5 years ? What if its worth a lot less and they try and back out ?

You need to allow for all of this, make a nice contract and it should be OK.
 
Well basically in that 5 years you just get about 220K more than the rent if you escalate it at 12% (Which is already ridiculous). You loose all the way I think.
 
There's no bond.

At face value discussing it casually, I could *see* I'd lose out - but I wanted to ask and persue to see exactly how and why I'd lose out. Pretty much if we go ahead, I should only take off the extra money over and above the rent. So if they pay R10,000.00, I'd 'take R2,700.00 off the final purchase price.
 
I do appologize but this is a bad idea.

At present you are currently getting somewhere in the reagion of a 5-7% return on your investment, while not great, it's something.

Why on earth would you want to effectively give away your income? Should you sell the property to your current tenants as you have explained you will litterally be giving them all of your income over the 5 years? Why would they be due this amount, they certainely would have not earned it? You are owner of the property, you are entitled to all proceeds whilst it is in your name.

Should you consider thieir proposal, consider the fact that you might as well have the property standing empty for the next five years and then sell it at a reduced cost. This is a much easier way to lose the same amount of money...
 
No need to apologise ;)

Yea - I see it is a bad idea (for me). I DO want to sell the house ASAP though and buy something else, but due to legal reasons I cannot do this before 2015 anyway. First thing I thought was 'nice - a monthly income and guaranteed sell in 5 years' ... but as I say, I knew there was a catch somewhere.
 
I'm pretty sure your tenants will put some sort of clause into the contract, so that in the event of them not buying the house, you will refund them for any improvements made.
That's another can of worms altogether. ;)
 
Pegasus said:
I'm pretty sure your tenants will put some sort of clause into the contract, so that in the event of them not buying the house, you will refund them for any improvements made.
That's another can of worms altogether. ;)
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True ...

Soundds more hassle than it's worth ;)
 
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