“You want me to lock into a price today on a house that could be worth $30K less in two years? You’re crazy!” (Potential rent-to-own tenant)
Human nature is a funny thing. There is a herd mentality that seems to be so tough to break. If everyone is buying, then it is the time to buy. When everyone is selling, it is time to sell. When everyone is doing nothing, it is time to do nothing. And so on.
The shrewdest, and consequently, richest investors do the opposite. Examples:
1. “I buy straw hats in the winter.” (John Paul Getty)
2. “The time to buy is when there is blood in the streets.” (Wall Street Mantra)
So, basically, the idea is to buy low (and when no one else is) and sell high. That makes sense to me. Let’s see how this translates into rent-to-own deals being formulated today.
Rent-to-own home transactions (aka lease options) have become in vogue in the past year or two since the banks stopped lending to a large part of the public. Lease options allow tenants to lease the property, while buying an “option” (aka the contractual right) to purchase the property at a locked-in price sometime in the future (typically anywhere from 1-3 years). So, in short, the rent-to-own tenants rent and can buy the property at a pre-negotiated price anytime during their lease period. It’s pretty simple.
The purchase of the option (cost: typically 1-5% of the home’s purchase price) is a sticking point for some tenants now; I would argue that it is the best, and most vital, part of the deal for people who want to be homeowners, especially now. Why? For a few thousand dollars, the tenant gets:
1. Peace of mind: the owner cannot sell the property out from under them, nor jack up the purchase price at the last minute
2. Financial flexibility: the option can be exercised (aka the tenant purchases the home), or not. So the house can be test-driven for a few years and the tenant can choose to buy it if they like the price of the home; if not, they can keep renting or move-out. Let’s take a quick poll: how many people who bought homes in the past 5 years wish that they bought an option (with the ability to walk away hassle-free from the house) instead of actually purchasing? Let’s see… a few thousand dollars to buy an option or the home value dropping tens of thousands of dollars minimum with no escape clause. Your call.
3. Home flexibility: the tenant can make upgrades, paint rooms, and basically make the home their own. They don’t have to ever move out, if they choose.
4. A brilliant bet on the housing market
What? What’s with point #4? Lease options equal a tenant bet? No, not just a bet, but a great bet. A brilliant bet.
The housing market is in flux. There has been a prolonged historical drop in home prices that is trending even lower. People are scared. The crowd is not buying homes. There is blood in the streets. Wait- could this be the time the great investors would be telling you to buy?
Of course. The housing market is really low. Through a lease option, rent-to-own tenants could buy an option to lock into a depressed home price today that would be exercisable for the next several years. And the option would cost only a few thousand dollars, and has a huge upside for profit when the housing market recovers.
Break away from the crowd! Use lease options for brilliant financial returns!
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. His newest book, A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants (Delight Clients, Fill Vacant Homes, and Earn $2,250* Upfront! (*Minimum!)
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