Charlotte Property Management Weekly: Is Rent-To-Own a Scam? Wait-Who’s Laughing?

“I would never take advantage of a person like that, this whole rent-to-own thing. Taking a non-refundable, upfront option fee of thousands of dollars from them? Like my Broker-in-Charge said, it’s almost criminal!” (Concerned Charlotte Realtor)


“Are you crazy?” (Keanu Reeves)

“No, poor people are crazy. I’m eccentric.” (Dennis Hopper in "Speed")


“If you can’t spot the sucker in the first half hour at the table, then you ARE the sucker.” (Matt Damon in "Rounders")


Back in 2006 when life was good and real estate sales were plentiful, I got a call from a friend of mine from New York City. He worked in finance for one of the big firms and was doing pretty well. Typically, I listen to him talk about finance for a while and then he would ask the perfunctory, “So how’s work going for you?” As I would break into the wonder of rent-to-own homes and property management, I could hear his stifled yawns. This time was different.

Right off the bat- “Brett, what does the Charlotte condo market look like?” Well, the Charlotte condo market was booming; we had more cranes in the air than Dubai (OK, not really, but you get the point). I explained that many projects had broken ground (or were breaking ground), presales were a feeding frenzy, and everyone was bullish on the growth of Bank of America and Wachovia; the condo projects were selling out. Most of them wouldn’t be completed for a few years, but people were putting down deposits to get their share of the “Uptown Charlotte Dream.”

“So how much do they want to put down to lock into the option to buy one of these?” he asked. Developers were looking from anything to $500 to 5% to lock into a purchase price and the right to buy the condo several years in the future. He asked me to pick a condo building I liked and then to send him the contracts so he could lock down 3 of them. His strategy was to never actually buy the units themselves; he was just looking to sell his options for a nice profit to someone else. The construction lag gave him years to determine his exit strategy. He had done this in Miami and made around a $100K selling his options a few months prior.

So, why am I telling you this? I’m not trying to conjure tearful memories of a dynamic buy and sell real estate market. In fact, if it makes you feel better, he lost his deposit money because he couldn’t sell the options after the condo values fell. But I think it makes three interesting points in terms of making and losing money:

1. Buying options (for property at market value) in an inflated real estate market is a bad investment.

2. In an inflated market, buying an option to buy a property is a million times better investment than buying the property itself. Having the option to buy does NOT mean you have to close and take possession. Walking away (legally!) and eating the small loss for the cost of the option is a lot cheaper than trying to sell a property in a “Great Recession” market. (I should hear some “Amen’s” here)

3. Buying market-value options in a depressed real estate market is a great investment. Let me repeat myself. Buying options in a down real estate market is a great investment. That is basically what my friend did. He bought the Miami condo option before the market exploded and walked away with a $100K.

Back to the initial question: Is rent-to-own a scam? My question would be, “for whom?” Is it a scam in favor of the rent-to-own tenant who pays a few thousand dollars for the right to lock into today’s depressed value of the home? Or a scam in favor of the owner who gets thousands of dollars from a tenant who might not even buy it?

It’s much like another question: Is the blackjack dealer scamming you when you lose $10K, or are you scamming the casino when you leave the table flush with cash?

I would go with neither. There is no scam. Win-win transactions are made in such ways. In a rent-to-own deal, the seller gets a few thousand dollars, peace of mind that their mortgage is being paid while the market is terrible, and probably won’t feel badly even if the tenant doesn’t buy at the end of their lease. It works for the tenant as well. For a few thousand bucks, the rent-to-own tenant gets “options”- they can buy or walk when their lease is up. I would bet a lot of people would rather have an option now instead of having bought (like me!). How much would that be worth?

So no one is scammed. Maybe both are laughing?

Brett Furniss is the President & Owner of BDF Realty, “Charlotte’s Most Innovative Property Management & Investment Company” specializing in rent-to-own (lease options) and rent-to-sell homes. He is the author of the FREE E-Manual entitled “How to Rent-To-Sell Your Own Home” which details how to get the most potential buyers to your home in this challenging real estate market.

Charlotte Property Management Weekly: Innovate Quickly or Die! In Real Estate?

“The economy will be back and things will be back to normal.” (Calm Charlotte Realtor)

"Only the Paranoid Survive" (Best-selling book by former Intel CEO, Andrew Grove)

“Financial Crisis
Stalled too many customers
CEO no more”
(Haiku twitter message posted by just fired CEO of Sun Microsystems, Jonathan Schwartz, 2/4/10)

The economy is moving fast. And it’s not just about competing with people in your town or region; now the competition is global. As Pulitzer-winning journalist, Thomas Friedman’s latest book’s title says, the world is "Hot, Flat, and Crowded". Putting aside the global warming “Hot” part of the title, the world is “Crowded” (with a rapidly growing population) and the internet has made it “Flat” (where people can compete with you from anywhere on the globe). This is scary stuff- more people in more places are going after your piece of cheese.

So when you stay still, the competition is gaining on you. You will not win in this global economy doing the things you’ve always done. In 2007, the National Academy of Sciences said that approximately 85% of growth in the world economy is due to innovation (ideas), with only 15% coming from other factors like productivity gains. As Jeff Wacker, the EDS futurist said, “The bullet that kills you never takes you between the eyes. It always hits you in the temple. You never see it coming, because you’re looking in the wrong direction.” Innovation comes rapidly and without mercy. Capitalism kills.

For further evidence of that, let’s look at the Fortune 500 (the 500 biggest companies in America). Between 1955 and 1995, the turnover on this list was around 20 companies a year. From 1995 to present, the turnover is 8% annually and growing. The Fortune 500 in 1995 only had 250 original members left in 2008. The companies that continued to innovate remained relevant, while the ones that didn’t were left behind.

How does this happen? Well, companies come up with new ideas and are able to sell them initially for a high profit margin. However, other companies from all around the world copy these ideas and make them cheaper and better (decreasing profit margins for the idea creator while lowering prices for consumers). Another way is that some innovations are completely disruptive and change the very face of the industry; think about the digital camera destroying Kodak’s Polaroid, and Apple’s IPod rendering the portable CD player obsolete. A better solution comes one day and you can be out of business the next.

So what does this mean to real estate? It means that we better come up with ways to innovate and keep ourselves relevant. With most big real estate companies staunchly staying with traditional buy and sell services, they have made themselves susceptible to a disruptive, game-changing idea. Consumers are frustrated and want to be able to transact real estate; their business will flow (in a heartbeat!) to whoever can do it the fastest, best, and cheapest. Cost cutting measures, such as mergers to achieve economies of scale, will keep big real estate firms solvent for a little longer, but not relevant and growing.

When the economy and real estate market were booming earlier this decade, new entrants with new business models (RedFin, Zillow, etc.) offered niche real estate services for less money; this worked because they significantly kept their overhead lower than traditional firms which allowed them to still earn a good profit margin (which also was cheaper for consumers = good). Some brokerages went the discount route to compete against them, hoping to compensate for the loss of profit margin with increased sales. As this unfolded, sales commissions went on a downward trend. This should not be alarming; this is the natural activity of our global economy. However, earning less money for the same amount of work is disconcerting.

But the possibility (and likelihood!) of a disruptive innovation is potentially much scarier. For example, what happens if Google decides they want to offer real estate services for free? They are already mapping our listings. What about if they mail out free lockboxes to homeowners and find a way to assuage their security concerns? Consumers could do their own showings. What if they gave homeowners the ability to list their own homes on Google’s nationwide MLS system? What would this do to our jobs?

This, or something similar, WILL happen. And it will happen soon. Every industry in our global economy is ripe to be attacked and reconfigured, especially those that are considered to have an unwarranted high profit margin (like real estate). Nothing is sacred.

That begs the question: How will you stay relevant? How are you doing things faster, better, and cheaper for your customers?

Brett Furniss is the President & Owner of BDF Realty, “Charlotte’s Most Innovative Property Management & Investment Company” specializing in rent-to-own (lease options) and rent-to-sell homes. He is the author of the FREE E-Manual entitled “How to Rent-To-Sell Your Own Home” which details how to get the most potential buyers to your home in this challenging real estate market.

Charlotte Property Management Weekly: Santa Claus, Unicorns, & Risk Free Transactions (Or “How to Risk Manage Yourself Out of a Living”)

“I can’t do lease options. They are way too risky!” (Concerned Charlotte Realtor)

“That's why it's a short cut. If it was easy, it would just be the way.” (Paulo Costanzo in Road Trip)

“It ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in introducing a new order of things, because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new. The coolness arises partly from fear of the opponents – who have the law on their side – and partly from the incredulity of men, who do not readily believe in new things until they have a long experience of them.” (Machiavelli in The Prince)

Risk, or implied risk, is an interesting thing (or a great board game that my brother would destroy me at when we were kids). Risk brings fear, and fear is scary, right? But risk is also a great motivational tool. I mean, what would history look like if the characters didn’t take risks?

1. Rudy, the supermarket clerk, enjoys watching Notre Dame football games in his free time
2. David decides to stick with what he knows out in the fields and stays out all of the whole Goliath-led Philistine / Israeli conflict
3. Obama decides to let America continue to be a capitalistic society (kidding, kidding, kidding…)

Life is about taking risks; so is business. And so is real estate. I was talking to a friend of mine who owns a business and he said something to the effect of, “My lawyers tell me a lot of things they don’t want me to do. Some I listen to, some I don’t.” I was in a real estate seminar recently and one of the presenters harped on that rental contracts need to make sure to include what would happen to the renters if the house burned down. I mean, give me a break. What are the odds that a house burns down? You need to pay a lawyer to write this into a contract? What about if a helicopter crashes into the house instead?

Maybe it’s the whole McDonalds thing. They got sued because someone burned themselves after ordering coffee from them that was hot (shocking!). This person did not sign a disclosure, prior to receiving it, saying that they understood the risks of drinking coffee. Out of the trillion cups of coffee McDonalds has served since it opened, this was an issue one time. If McDonalds had to disclose every risk a customer undertook while visiting their restaurants and eating a happy meal, no one would ever have time to eat there. Yet how many billions can they claim have been served successfully in the last 50 years (without incident)?

If coffee is risky, it has nothing on what I’ve heard about lease option (rent-to-own) contracts! I never knew so many things could go wrong! I thought it was just people renting a home, and then trying to get qualified to buy it from the seller. If they didn’t buy it, they just moved out at some point. But the risk of rent-to-own, versus “regular” real estate transactions, has apparently reached a level known as “crazy dangerous.” (Think parachuting into a Taliban village wearing American Flag pajamas)

Aren’t riskless transactions a myth? Think about it. Buying and selling a home should be relatively riskless, right? I’ve never heard any Realtors say that closing brokerage deals was something to be concerned with. But… what about the houses that sold for $1M a few years ago and now sell for $400K today? That sounds pretty risky to me; risky to the tune of $600K of lost net worth.

Before I get a bevy of Realtor hate mail, I don’t think that this was the Realtor’s fault at all (I’m a Realtor!). My point is that every transaction has risk for someone at some point. Warren Buffet is considered one of the greatest investors who ever lived. However, if you invested your money with him in 1974, you would have lost almost half of it! In 1990, you have lost almost a quarter of it! You could have safely put your money away in US treasuries for 2-3% a year instead. Why would you take on the extra risk (potentially losing half your money- gulp!) and pay Buffett’s management fees on top of that?

It’s because we want to do better than barely beating inflation. Your clients want to do better than have their house sit on the market while they bleed money every month. They want a professional, like Warren Buffett, to use his tremendous ability to maximize their assets. Isn’t this why your client hired you? Then why is a lease option (or some other creative sales tool) “out of the question”?

Professionals know there are always risks. But professionals educate themselves so they can mitigate them and offer (almost) all of their clients a better return than playing it the safest.

"Take calculated risks. That is quite different from being rash." (George S. Patton)

Brett Furniss is the President & Owner of BDF Realty, “Charlotte’s Most Innovative Property Management & Investment Company” specializing in rent-to-own (lease options) and rent-to-sell homes. You can follow his Twitter thoughts on the Charlotte real estate market by clicking on http://Twitter.com/BDFRealty. He is the author of the FREE E-Manual entitled “How to Rent-To-Sell Your Own Home” (http://www.RentToSell.com/RTS-Book.html) which details how to get the most potential buyers to your home in this challenging real estate market.