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.

Charlotte Property Management Weekly: Better to Rent or List Your Home for Sale? 3 Question Litmus Test

This seems to be a FAQ these days. As a property manager in Charlotte, we get many calls from people asking themselves this question.




I didn’t think there was a one-size-fits-all answer to this, but I was corrected. It just seems to come down to who you ask. If you ask:



1. Realtors: “You should definitely put your house on the market! Interest rates are at all-time lows!”

2. Property Managers: “Nothing is selling in this market. You can either eat your mortgage every month as it sits or have a respectful renter pay it for you.”



So which is the right answer?



It really depends on your answers to these 3 questions:



1. If you wanted to live in the area your home is located, would you buy your home at the price it would be listed at? Take an honest look at comparable homes for sale in our area. If “yes”, list. If “no”, rent.

2. Does your house have a differentiator that would make it more appealing than cheaper, comparable houses (aka foreclosures and short sales)? If “yes”, list. If “no”, rent.

3. Can you stomach a possible rogue renter and locking into a negative cash flow for a year or two? If “yes”, rent. If “no”, list.



These questions make it easy and really boil down to a simple question:



Is your home among the best of the best?



If not, it’s like trying to sell your clothes retail when everyone else is having a 50% off sale. If your home is special and you can communicate this effectively in your marketing, then list your home for sale and be confident it will sell. If it is not, then you must rent until banks starting lending to the masses again.



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: Top 6 Miscellaneous Tips for Rent-To-Own Deals

The following is an excerpt (3 of 3) from A Real Estate Agent’s Complete Guide to Representing Rent-To-Own (Lease Option) Tenants by Brett Furniss (2010)


1. Option money (written in the contract as such and paid to the owner) should be used as down payment funds (remember to both source and document!). Monthly rent credits can be used to pay closing costs or reduce the purchase price of the home.


2. What about a security deposit? Typically, there isn’t one for several reasons. The first is that tenants only have so much money to put down (option fee, first month’s rent, moving expenses, etc.). The second is that the tenant should be treating the home well (and not destroying it), being that they entered into a contract to potentially buy it.


3. What about insurance? For the rent-to-own buyer, I always recommend renter’s insurance. It’s cheap (around $100 a year) and you’re really glad you have it when something goes wrong. For the seller, they just need to call their insurance provider and switch from a “homeowners” to a “landlord” policy. Typically, there is no price difference.


4. What about inspections? The blanket, conservative answer is to get them done prior to move-in and then the house sells “as-is” at closing. However, being that the tenant will be living in the home for a year or two and the owner is paying for any repairs above $500, you can look at this at a case-by-case basis. Broken things will be found out quickly while living there.


5. What about the much publicized “higher rental rates” you hear about that rent-to-own arrangements command? I don’t see evidence of this. Does this ever happen? Sure. Does it happen often in competitive markets? No. As an example, try to list your rental home for $200 above market rate as a “rent-to-own” and see what your response rate is. There are plenty of rent-to-own opportunities at market rate rent (or below).


6. What about paying for an appraisal prior to move-in? I think this is a waste of money. You can just use comps, negotiate the price, and then wait. When the tenant goes to buy the home, the bank will send an appraiser.

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. For a FREE look into his new 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!) go to www.RentToOwnAgentGuide.com. You can contact him directly at Brett@BDFRealty.com.

Charlotte Property Management Weekly: It’s All About the Narrative: The Key to Maximizing Your Rent-To-Own Client’s Value

“I can’t sell this couple on anyone. If their financial history was made into a movie, it would be in the “Horror” section. Well, the “Drama” section would fit, too. And with eight kids, it could probably be get into the “Adult Content” section as well… (Charlotte Realtor bemoaning the plight of their rent-to-own client with less than stellar credentials)



“Beauty is in the eye of the beholder.” (Plato paraphrased)


In the world of corporate mergers & acquisitions (M&A), the name of the game is negotiation. If you are a big company, you want to acquire a competitor for as little as possible. On the other hand, if you’re the smaller fish (or “acquiree”) you want to sell yourself for as much as possible. So the companies go back and forth and try to pitch their case for their “true value” as fervently as possible.


But how does one find “true value?” Well, the common method is to take book value (what you can sell all your assets for) and add in the future value of projected cash flows. From this, you get what the company is worth. This sounds so simple.


If it was so simple, the majority of young males right out of college wouldn’t lie to women at bars and tell them they were “investment bankers.” Investment bankers are the people who value the companies and put these deals together. By doing so, they make a lot of money and work a ton of hours. This accomplishes two things for these young suitors:


1. Women think they are probably rich and, thus, would be a good future mate

2. Women think they have a legitimate excuse for seldom calling and shouldn’t be offended if they only hear from them at late hours of the night after “work” functions


But, I digress…


The reason these investment bankers make so much money is not when they calculate the book value of a company; this is easy. In normal deals, anyone can appraise the assets and give a market value. And, on most deals, this yields the least amount of money. The trick (and there most of the worth is locked) is in the estimated value of future cash flows. What are they really worth?


An example: A drug company has cash flows of $100M a year and is growing at a 10% clip. This should be easy to value, right? But what if the company has a drug in their pipeline that (they say) is two years away from being patented and serves a $2B market. What is that worth? Shouldn’t that be used in the value calculation? Probably, right? That’s the main reason why the big pharmaceutical company wants to buy them. But there is no guarantee the drug will ever be approved. Hmmm…


This is where it gets tricky. And this is where the investment bankers earn their money. What do they do?


They create the narrative. They tell a story (that fits their goal) and use chosen statistics to back it up. This isn’t lying; no one knows what is going to happen in the future.


Four years ago, Wachovia Bank bought Golden West Financial for $25.5B on the investment banker narrative that it would give them a formidable bank presence on the West Coast and access to the lucrative California market. The investment bankers that Golden West hired said this deal would increase their future cash flows for years! As you know, it didn’t work out like that. A few years later, Wachovia almost went bankrupt as a result of this deal and was gobbled up by Wells Fargo.


It works the other way as well. When Google was a start-up and looking for capital, they made many promises of how they would provide great, future returns for their investors; all they needed were a few millions dollars. They swore they would revolutionize the internet. And Google’s investment bankers were right- their investors made obscene returns on their money and most don’t ever have to work again. It turned out that the value of the company’s future cash flows in the narratives told was extremely understated.


So, how does this tie into rent-to-own tenants? Most of the time, on paper, there “book value” is very low. They have lower credit scores, might have a foreclosure on their record, and might have even had to be evicted. Who wants to work with this person? Based on their record, you probably don’t even want this person renting your home. They’ll never buy and might not even pay rent! If you don’t want them, how will you sell someone else on their merits? Before you shut the door, remember that book value is a small part of valuation.


The question is: What is their future value? What is the narrative behind the tenant’s story? We run into good people all the time that have had some difficulties in their life. Divorce ripped apart their financial situation; neither spouse was willing to pay a bill (crushing their credit) and they both hoarded and hid their cash. Or job loss happened and they couldn’t get rehired. Or their son got sick and they didn’t have the proper insurance coverage; they leveraged everything they had to save him. Wouldn’t you do the same thing?


When you have a questionable candidate, be like an investment banker. Find out what the story is. Many times, this is where the “true value” is found and how you can sell the probability of good future cash flow for the seller. Once you find these selling points, you can create a narrative which creates value for you, your client, and the seller (win-win-win). 700+ credit stories are easy to sell (great book value); the harder cases are where you earn your money through the narrative (while increasing your client base and earnings).

Remember, maximizing value is all about the narrative!

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.