Charlotte Property Management Weekly: Lessons from the Banking Crisis for Properly Structuring Incentives for Rent-To-Sell

Potential clients of ours ask, “Why do you charge a “Realtor Fee” of 5% or 6% when a rent-to-own tenant buys our home (rent-to-sell)? Some of your competitors provide the tenant, keep the upfront option fee, and then let us manage the property. We then only pay the attorney fees when the tenant buys.”




We answer, “So you don’t experience something akin to the banking crisis.”



“What does that mean???”



Let me explain.



I’ve been reading a lot of books lately on the banking crisis over the past few years. There were two things that I found very interesting:



1. When banking firms went from partnerships (owned by the firm founders and selected employees) to public entities (owned by stockholders), the risk level banks were willing to take on skyrocketed. This was because the risk shifted from the partners to the shareholders.

2. Lenders originated sub-prime loans, securitized them, and sold them off (without keeping any). They earned their fee (the incentive) at the beginning of the loan process and didn’t have to be around later to see if the loans were any good. These loans are now the “toxic assets” held by investors and financial institutions that ruined our economy.



So what does this have to do with rent-to-sell (placing rent-to-own tenants into vacant homes until the tenants buy them)? A lot, actually!



We charge the Realtor Fee because we want to get paid when the rent-to-own tenant buys the house. I guess I don’t know of many real estate firms that don’t want to get paid (on anything and everything!). But the point is that this is actually in the client’s best interest. What???



If a firm only gets paid (the incentive) when a tenant is placed into the home, then the firm is going to place a tenant into the home as quickly as possible. The incentive ends there. There are no financial reasons (besides referrals) for the firm to care whether the tenant pays rent after they move in (no incentive in place) or if they buy the home during their lease period (again, no incentive).



But if the firm that places the tenant also gets paid to manage the property (incentive), the firm will probably care if the tenant pays rent. And, if by far, the biggest bonus (Realtor Fee) is achieved when the tenant buys the home, then the firm definitely cares about placing tenants who want and can buy the home!



Wait- so how does this fit in with the banking crisis again?



It’s all about incentives! They need to be aligned properly to cause the desired behavior. If banks had to hold on to the subprime loans they made (and were paid incentives when the borrower paid their mortgage every month), they wouldn’t have taken on so much risk and allowed non-credit worthy borrowers to qualify.



It’s the same with rent-to-sell. If you want a tenant to pay rent every month and then buy your home, it is wise to incent your property management firm throughout the whole process (tenant procurement, management, and sale).



Your results will typically be a direct product of the incentives you have in place.



Brett Furniss is the President & Owner of BDF Realty (“Charlotte’s Most Innovative Property Management & Investment Company”), and Rent-To-Sell Realty (“When You Need a New Solution to Sell Your Home”) which specialize in rent-to-own (lease options) and rent-to-sell homes. You can contact him directly at Brett@BDFRealty.com.