Charlotte Property Management Weekly: Rent-To-Own: Why Locking into a Home Price Today is a Brilliant Bet

“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!)

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.