Charlotte Property Management Monthly: Island of Misfit Toys Dilemma: Bernanke Says Rent-To-Own Can Save the Housing Market?

“Rent-to-own provisions, which would give existing tenants the option to purchase the home during their tenancies, might facilitate the transition of some renters back to the owner-occupied market. Such provisions may also reduce costs by encouraging renters to maintain their properties to a greater extent.”


(Ben Bernanke, US Federal Reserve Chairman)



I was interviewed recently about the rent-to-own home market (read article by clicking here) and what Bernanke said above. His assertion made a lot of sense to me. It led me to a flashback of the TV Christmas special, Rudolph the Red-Nosed Reindeer, and the Island of Misfit Toys.



The Island of Misfit Toys was the dumping place for all of Santa’s broken and imperfect toys that his elves bungled. The toys did not fit the criteria of what the good kids wanted, so they were never delivered by Santa and were sent to the dreaded Island instead. It wasn’t the misfit toys fault; all they wanted was to be loved by children.



Then there were the poor children that didn’t receive any toys from Santa. They would have loved to have gotten these imperfect toys to play with and love. But no one knew how to make the exchange happen. The idea made a lot of sense (matching unloved, misfit toys up with poor kids that would love them), but the logistics plan was lacking.



It’s a similar situation in the current housing crisis. People are not able to buy homes, and in turn, people are not being able to sell their homes (it takes two to tango!). So wouldn’t it make sense to match up the two largest groups with the two largest needs in today’s housing market? They are:



1. “Wanna-Be Sellers” (WBS): “Could someone please bring a somewhat decent offer and buy my house??? Please?!?!? It has been on the market forever and I can’t reduce the cost any more! These payments are killing me and I’m looking at a short sale or foreclosure.” (Or “I have broken toys that the kids with money and credit don’t want!”)



2. “Wanna-Be Buyers” (WBB): “I would love to buy that house but I can’t get a loan due to my low credit scores and lack of a big down payment. Banks just won’t lend to me!” (Or “I have no toys, but want one to love!”)



So the head of the Fed brings up rent-to-own as a solution. Let the Wanna-Be Buyers (WBB) rent-to-own the Wanna-Be Sellers (WBS) homes (aka rent-to-sell). Walla! Problem solved! If the WBB pay their rent on time and in full for a year or two, they qualify for a loan in the house they are in. If they don’t, they move out of the house at the end of their lease and rent another home to live in.



So why is there still such a housing issue? Because “rent-to-own” and “rent-to-sell” are still largely being unutilized. But with such a large group of WBB and WBS out there, how can this be? Why aren’t real estate agents jumping on a chance to work with them?



Surprise! The two main reasons are related to money:



1. There is no loan program (that I know of) that gives low down payment and low credit score WBB a mortgage based on rental history. (No money to transport the toys)



2. Real estate agents don’t think there is enough money in it for the risk and headaches they think they are potentially taking on by transacting rent-to-own and rent-to-sell deals. (No manpower to find the toyless kids and deliver the toys to them)



The first reason could be solved with a government-sponsored loan program for renters. It would be based on landlord history. Yes, I know it would be open to fraud, but the smaller brush strokes would need to be worked out by people smarter than me.



The second issue is incenting the manpower to carry the mission out. Generally-speaking, real estate agent compensation is relatively simple. They help someone buy a house and get thousands of dollars. They help someone sell a house and get thousands of dollars in commissions.



But this rent-to-own thing? Placing WBB in homes typically only generates a nominal commission. For example, in Charlotte, 10% of the first full month’s rent is a common commission rate that is offered. So the math isn’t that great for real estate agents; for filling a house that rents for $1,000, they earn a commission of $100. At $4.00/gallon gas, that isn’t going very far. Then the agents must hope that their WBB purchase the home in a year or two so they can earn their much larger sales commissions. That is hard to keep track of, is uncertain to happen, and doesn’t pay the light bills today.



Hypothetically, if the commission structure was changed (augmented by the banks and government?), it would be interesting to see what would happen. If real estate agents received $3K for placing WBB into WBS homes, that would generate interest. Then if they were also given the selling commission if the WBB wound up buying the homes, that would make it even more enticing. I’d imagine that the WBB would be shown the WBS’ homes pretty quickly!



I believe this would also be a significant bargain for homeowners, banks, and the government (still holding tons of defaulting mortgages). It has the potential to stop the erosion of home values and become a true win-win-win-win-win for WBB, WBS, banks, real estate professionals, and our country’s neighborhoods. It would also create jobs and get money flowing into the housing sector.



The only thing missing is the financing for the renter loan program and commissions for the real estate agents. On the Island of Misfit Homes, it worked well because Santa and the elves worked for free on a handshake deal. In real life, we need the government and banks to step up with cash incentives and guarantees.



Filling vacant homes that aren’t selling (WBS) with renters who want to buy them (WBB) seems like the solution that worked on the Island of Misfit Toys. Is Bernanke ready to pay up to transport and deliver the toys?



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!)

Charlotte Property Management Weekly: Wouldn’t You Want the Market to Know Your Rental is For Sale?

As a Charlotte property manager, we work with many clients who are looking to rent-to-own a home. As the banks continue their non-lending ways, this group of clients continues to grow.




To find homes for them, we look through many sources. Homes listed for rent-to-own (aka lease option or lease purchase), homes for sale, and rental homes. We approach the agents of these homes and ask if their client (the seller) would be open to a lease option arrangement; some of them are and some of them aren’t. Lately, obviously, sellers are more open to this arrangement.



Asking agents of rental homes and homes for sale whether their clients are interested in rent-to-own can be a timely process. The manual effort of calling and leaving messages, and then waiting for responses when the rent-to-own client wants to see the home now, makes it a very arduous process. Then the discussion of actual terms makes this go on forever.



However, in an increasingly illiquid market, most wanna-be sellers are turning to the rental market to decrease the short-term pain of monthly payments on their vacant homes. What they really want to do is sell (and not of the short variety).



If this is true, doesn’t it make sense to have a discussion about this prior to listing the property? The conversation would start with, “Hey, we’ll put your home on the rental market even though I know you really want to sell. Taking this into consideration, we should also communicate to the market your willingness to sell it through a tenant-buyer purchase (aka rent-to-own, lease purchase, or lease option). To do this, we need to sort out three things upfront:



1. Monthly rental price- OK, we got this already

2. Option money required upfront for lease option- 1-3% of the home price is good

3. Rent-to-own sales price- 3-5% appreciation a year probably works



By including this in the listing copy, the market now knows how serious your client is about selling (aka rent-to-selling) the home. This now turns into a potential win-win-win scenario.



Win- Seller sells their home

Win- Tenant-buyer locks into the home they want and are building up a down payment (upfront option fee) and closing costs (monthly rent credit) to purchase in 1 to 2 years

Win- Agents get paid on rental and sale



Note: Your pricing upfront for rent-to-own can also signal to the market how uninterested your client is in selling. If your client asks for a $300 rent premium per month on the rental, 20% upfront option fee, and 15% annual home sale price appreciation, it is clear that they have no interest in rent-to-selling. Actually, this would be good for other agents to know as well!



Ask and you shall receive. Don’t ask and the logic still works!



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.

Charlotte Property Management Weekly: Rent-To-Own- Just like Burger King for Buyers and Sellers

A lot of banks don’t like Burger King. Why do I say that? It’s simply because they don’t want you to “Have it Your Way.”




I’m obviously a fan of rent-to-own. It’s sort of a nice change from the rigid rules that mortgage underwriters make clients go through. For example, banks have rules like:



1. Must have 3.5% down and it must be meticulously sourced

2. Credit is now run the day of closing. Anything on that report that the underwriters don’t like will cause the loan to get kicked.



This has caused much client consternation. Some have been left in moving trucks in front of what they thought were going to be their homes; then the homes don’t close and they have to go back to their the old homes. I’ve heard that this isn’t a fun experience.



But, rent-to-own on the other hand, is really flexible. There are no rules that wouldn’t allow a tenant to move in. For example:



1. As long as they have the money, who cares where it comes from?

2. If the house is vacant, they could move in the next day (after a tenant screening)

3. If they need additional time to get qualified for a loan, the lease can be extended indefinitely

4. There is no reason for the seller to wait to make financial moves. As long as there is a signed lease, they can submit this to the bank and do what they want.



Rent-To-Own is like Burger King, for both the buyers and sellers. Both can “have it their way” when they negotiate the rent-to-own transaction.



So have fun and put together rent-to-own deals that benefit both parties. And, while you’re on a Burger King kick, get the French toast sticks while you’re there; they are really good!



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.

Charlotte Property Management Weekly: Solving the High-End Home Sales Stagnation with Rentals and Rent-To-Own

Realtors everywhere are breathing a sigh of relief with the upswing in home sales in April and May. Things seem to be picking up a little, they have some money in their pockets, and there appears to be a light at the end of (what has been) a very dark and long tunnel of diminished sales activity.



Though, with the end of the tax credit, it looks like the roadrunner might have just lathered some white paint on the wall ahead as pending home sales are dropping fast.


Owners of higher end homes in Charlotte, defined here as over the FHA maximum of $304K, never really saw this light. They have beautiful homes that are priced relatively low (much too low they would say- and I would agree!). Their houses are still are not selling and the monthly nut on them is just sucking the life out of them. Unfortunately, banks are now requiring so much more (700 credit scores and 10% down minimum) from potential buyers of these homes that there can’t be a fluid market.


So where does that leave them?


Most of the owners of these homes don’t want to go the foreclosure or short sale route. They also don’t like the fact that they know their homes have value that the market won’t recognize at present. Their sterling credit scores and reputation with their former neighbors mean something. They are just not willing to walk away when they can still afford the monthly payment, as unsettling as paying it every month is.


Many are realizing that they need a solution to get them past the next few years. They are starting to explore rental and rent-to-own options. They’ve heard the horror stories that people tell about renters, but they can also do basic math.


What do I mean by that?


Let’s take an $800K home, for example, and say the monthly cost is $4K. The current market value is $600K. They can rent it for $3K. We’ll assume a 2-year lease.


Not rented:

1. Loss of $4K+ (monthly payment, utilities, other holding costs)

2. Maybe sell it for $600K sometime during the time it is on the market vacant


The math: If not sold, they are looking at a loss of $100K+ in 2 years (24 months X $4K + holding costs) OR (if sold) a $200K potential “loss” on the sale


Rented:

1. $1K loss per month ($4K - $3K) on monthly rent versus their costs

2. Assume (medium-to-bad case of irresponsible renters): $15K of damages when the tenants leave (if they don’t buy)


The math: Loss of $39K ($1K X 24 months + $15K damages) if they don’t buy OR the realization of market value (around $800K depending on what the home appraises for at the time of sale) in a year or two if the tenant buys (through a rent-to-own scenario).

So, the results look like this:

Keeping their home vacant on the market: $100K - $200K loss
Renting or Rent-To-Selling their home: >$39K loss


Is it any wonder why the rental or rent-to-own option is gaining traction for higher-end homes in this economy?

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.