Unfortunately, we’ve decided to stop offering the option to “Sell and Rent Back,” also called a “Sale and Lease Back.” We get inquiries from people every day looking for this option, but our new approval requirements are so harsh that no one has been able to get approved for this in twelve months.
Our team at Mortgagebrokestore.com has been buying and selling real estate privately for about as long as we’ve been offering private mortgages. It seemed like a reasonable extension of our services, as many people couldn’t get a new mortgage and couldn’t sell on the MLS due to their circumstances. Our cash offers on Ontario properties were a good solution for some people facing prompt eviction or who were already evicted from their homes. Most often, these people just wanted to continue to live their lives without disruption, and the option to rent the home back after selling to us is something that appealed to many people.
Market Conditions Leading to Discontinuation
The most significant factors leading to the discontinuation of this option are, first, the decrease in house values across Ontario in the last 12 months and, second, the dramatic increase in mortgage rates.
Decrease in House Values
We’ve always been conservative in our private mortgage lending practice and cash home purchase offers. This means that we are always taking precautions, expecting that things may go poorly. This means a lower maximum amount for our mortgages and cash offers below market value. We believe that this is one of the reasons we’ve been able to continue business for as long as we have, while some of our other competitors have been struggling. One of our most significant considerations for our cash offers is the potential drop in house prices. According to RBC, house prices in Ontario dropped 18% from their peak in 2022. Due to our pessimistic nature, when people ask to sell and rent back for an additional year, our offer reflects the assumption that prices will drop an extra 18%. Since our default cash offer is already at least $100,000 below fair market value, this additional 18% drop was too much for anyone to bear.
Increase in Interest Rates
To buy houses for cash, we also borrow from major banks in the form of lines of credit and mortgages. This allows us to have large cash stockpiles for use in private mortgage lending and cash house purchases. Unfortunately, bank rates have nearly tripled in the last 12 months, making our carrying costs for purchased houses much higher. A line of credit loan for $1,000,000 at 2% was a manageable $1,666.67 monthly. Current LOC rates of around 6% mean $5,000 per month, more than we can reasonably expect in rent. This would mean negative cash flow for people who sell and rent back. To offset this, we’d offer a further reduced price for people looking to sell and rent back equal to our interest payments for the year. In the previous example, this is $5,000 * 12 months = $60,000, and this kind of additional discount would be hard for any potential seller to accept.
People who called for more information on this option were upset at the additional discounts we requested. We try very hard to be brutally honest and upfront with what we can offer and what we can do. Our goal is to turn inquiries away as fast as possible if we cannot help out of respect for people’s time. So instead of technically offering this option, but with conditions no reasonable seller would accept, we’ve decided to discontinue the option altogether. We are of the opinion that something should only be offered if a reasonable number of people can get approved for it.
Current Trends and Observations for Cash Home Offers
While we’ve been acting as cash home buyers for many years, it is only over the last two years that we’ve been promoting ourselves as such. While we’ve been promoting this offering, we’ve been receiving a few dozen inquiries a week for cash home offers. Many of our competitors are more aggressive with advertising but less forthcoming with information in our opinion. The very first thing we do with inquiries is to try and understand their situation and lay out their best options. Many of these inquiries looking for a cash sale get turned towards mortgage or realtor solutions that work out better for these people.
The Reality of Who Accepts Cash Home Offers
We stress that cash home sales are best suited for a very narrow niche: Those who cannot get a mortgage or sell traditionally due to their circumstances. Our absolute best cash home offers are $100,000 below fair market value. Many people call us about cash home sales for the convenience of a simpler sale process or to save on realtor fees, but the vast majority cannot justify discounts at the amount we require. In some cases, the houses we purchase are from people who have already been evicted or have property with such severe hazards that people cannot safely enter. These people have few options, so a cash home sale is sometimes the best option.
As the housing market began to decline and the buyers became more cautious, we’ve noticed a dramatic increase in inquiries for cash home offers. There are a few common reasons why we’ve rejected these in the past weeks.
- The mortgage debt owed exceeds the amount of our offer
- The estimated fair market value from the owner is much higher than our own
- Assignment sales, usually for condos, carry penalties that are too high
- Property is too rural or has strange features that hurt its appeal
The most common reason we reject an inquiry is due to people calling to sell a property that is already on the market and asking for the current full market value. Many of these people are realtors, but some others are homeowners that are just unsure of what a typical cash buyer can offer but have heard of them through advertisements. At the end of the process, when we buy a property for cash and resell, at some point, we have to incur costs, including real estate taxes, realtors, lawyers, and interest, so our business model just doesn’t work for buying properties at fair market value.
Our Continuing Commitment to Cash Home Offers
While we are ending our “Sell and Rent Back” option, we are still continuing to provide cash home offers. As market conditions change, we will continue to change our mortgage and private mortgage offerings. We continually review and refine our process to work efficiently and produce offers that can work for everyone. We do speak with other cash home buyers in Ontario so we know what kinds of prices they generally offer and we’ve refined a process that allows us to make fair and competitive offers.
When we get an inquiry for a cash home offer, our typical first step is to check publicly available websites such as realtor.ca , zoocasa.com, and housesigma.com. Our goal is to use the Comparable Sales Approch to get an estimate of the property’s current value. We’ll also always check the value’s produced by the HouseSigma property valuation tool, as well as other valuation tools offered to licensed real estate professionals at a cost. This approach works well for major urban areas, but not as well for rural or unique properties with few comparables. We can give general estimates of what our offer could be based on the data we initially gather online. Our firm and binding offer is usually given if the seller accepts our general offer range and proceeds with an inspection.
We will continue do our best to provide prompt service and cash offers that are in line with what our competition are offering. We are constantly working to improve our process for cash house offers and help inform people who call us. The vast majority of callers (over 99%) don’t end up doing any business with us at all, but we are still happy to take the time to explain things. If you have any questions not covered in this post, feel free to reach out to me directly at 416-499-2122 or by email at jonathan@mortgagebrokerstore.com
