Charlotte Property Management Weekly: Reaction to Proposed FHA Loan Changes for Those in Lease Option Contracts: “No Sweat”

There has been a lot of discussion surrounding proposed (and current) changes to tighten FHA loan guidelines. Heated discussions. Unhappy folks. Panic.




Real estate agents are unhappy. Buyers are unhappy. NAR is not happy. And if mommy isn’t happy, nobody is happy.



Why is this? Well, if more buyers are pushed out of the market for not having the proper qualifications now, the real estate market will continue to worsen. If that happens, who knows what the effect will be for the economy in general, and especially for those that are employed in the real estate industry.



It reminds me of one of my high school friend’s patented lines when he would see one of us wearing an ugly shirt or some God-awful hat, “I didn’t think there was a possible way for you to get even less girls, but you may have found it.”



To extend this wisdom to the real estate industry, if real estate agents didn’t think there was a possible way to do even less brokerage business, FHA may have found a way.



Don’t blame Congress; they don’t have much of a choice. They can’t responsibly sit idle while their GSE’s keep losing so much taxpayer money every quarter from loan losses. The choice is out of their hands.



The same is true with buyers and sellers in today’s market. If they go into contract on a home and the bank underwriters decide not to make the loan at the last minute, the buyer and seller have little choice: the buyer walks and the seller keeps the home on the market.



However, for those lease option buyers (rent-to-own) and sellers (rent-to-sell) under contract, there is a choice. No one has to walk; the lease contract can simply be extended until the lease option tenant qualifies for a loan. They can try to get a loan every month if they want. There is no panic, no one has to move, and the deal can still happen.



To further clarify, the lease option (rent-to-own) tenant is under a lease agreement and is paying the seller’s mortgage with their monthly rental payments. This lease can go on indefinitely (with mutual agreement, of course). As long as the tenant still wants to buy and the owner still wants to sell, no one is worried. It may take a little longer than both parties want, but the sale can still happen. This goes for any FHA closing issues such as low appraisals, increased down payment need, or higher credit score requirements.



Lease options provide greater flexibility to close deals in a changing lending environment. The lease can be extended and the terms renegotiated on the fly. Agreements can be salvaged and completed. Choice is a nice thing.



While others fret, lease option principals (including real estate agents) say “No Sweat.”



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: Are You Practicing Insanity with your Home for Sale?

The definition of insanity is to do the same things over and over again and expect a different result. Is this what is happening with all the vacant homes still being listed for sale (that shouldn’t be)?




I’m not talking about occupied houses where the occupants would like to move, but don’t have to. I think they should have their houses on the market; they could get lucky. As the Lotto says, “You’ve got to be in it to win it!”



I’m talking about vacant homes that are sucking dollars out of the owners’ pockets month after depressing month. If you need general help in identifying these homes that shouldn’t be listed for sale, here are some obvious signs:



1. The house is listed $50K more than a comparable home in the neighborhood (regardless of condition)

2. The house has been on the market for a few months and has had few showings

3. The house has been on the market for a few months and has gotten no offers

4. It is not in tip-top shape

5. The home is in a neighborhood riddled with short sales and foreclosures

6. The neighbors that don’t have a “For Sale” sign in their yard feel left out



As we continue to see owners with expiring listing agreements inquire about rent-to-selling their home (opening their home to a rent-to-own tenant), I wonder why they were listed on the market in the first place. As my conspiracy-loving friend said, “It’s probably because if the real estate agent has the house listed for a regular sale, they’ll be first in line to list it as a short sale.” I seriously doubt this is how most real estate agents are conducting business, but some of the houses on the market make me wonder.



Most homeowners don’t want to default (and yes, a short sale is a default). And they don’t mind paying real estate agents if they are helping them achieve their goals of lifting the financial burden of the home off of them. The question is how. There are a lot of homes on the market for sale!



And there aren’t many qualified buyers out there. But… By logical deduction, that would mean that there are a lot of unqualified buyers out there; we can call them “non-qualifiers” (yuck!) or tenant-buyers (rent-to-own tenants). These rent-to-own tenants would love to occupy the vacant houses on the market and buy them at some point. Hmm… that sounds like a win-win for the owner and tenant-buyer.



But what about the agent? We need a win-win-win. That’s the part where we know that clients are willing to pay for value. An agent just needs to sell the created value and put a price on it. It shouldn’t be too hard; a client who stops losing thousands of dollars a month will happily pay a fee and thank you afterwards.



Wouldn’t you?



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. He is also the author of 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: What’s the Difference Between “Rent-To-Own” and “Rent-To-Sell”?

Another popular question I hear from prospective clients is:




PC: “What’s the difference between rent-to-own and rent-to-sell?”



Us: “There is none!”



PC: “Well, if that’s the case, why don’t you eliminate the whole “rent-to-sell” terminology? I’ve heard of rent-to-own, but this rent-to-sell thing is new to me.”



Well, it’s a matter of perspective. A rental tenant who aspires to be a buyer would use rent-to-own as the correct terminology. Example:



“I want to rent-to-own this house. This means I’m going to rent the house, work on my credit until I can buy it, and then buy the darn thing before my lease is up!”



Most people get this part of it pretty easily.



Then there is rent-to-sell. This hasn’t been in the limelight until the past year or two, but has been picking up a considerable amount of steam in this poor economic environment. Now as more sellers have vacant homes sitting on the market and qualified buyers are nowhere to be found, they need a new solution to sell their homes.



So the sellers market their homes as rent-to-sell. They want renters to lease out their houses, make their monthly mortgage payments, and then buy them sometime during their lease period. If they don’t, that’s okay. They can then just rent-to-sell them again when the tenants move out.



To simplify, buyers rent-to-own (I want to rent and then buy the house) and sellers rent-to-sell (I am willing to rent my house out and let the tenant buy it). It’s that simple.



A more advanced example: A rent-to-own tenant would be looking for home sellers who would be willing to rent-to-sell their home to them. The rent-to-own tenant would lease the property, build their credit and down payment up during their lease period, and buy it from the home seller. Then the home would be considered “rent-to-sold.”



Yes, terminology can be confusing at times. But as more consumers and real estate agents are learning in this economy, knowledge of rent-to-own and rent-to-sell is imperative to housing liquidity.



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: 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: Maybe You Shouldn’t Fix Up your Rental Home?

The “Golden Rule” was an excellent idea as soon as Jesus said it; our lives would be so much better if we followed it all the time. But it’s not such a smart philosophy to follow it with rental homes. Let me explain.




There are many well-intentioned investors who believe that the “Golden Rule” should apply to their rental properties. “Do unto others as you would have them do unto you.” Through the years, I’ve heard:



1. “I like granite countertops. I imagine that tenants would also like to have them in my $75K townhouse that rents for $550 monthly.

2. “Once the tenant moves out, get started on the new paint and carpet please. I would want everything spotless and new.”

3. “Should we include all utilities in the rental price?”



Americans don’t want average homes for themselves; they want distinguished trophy homes without any flaws. Unfortunately, trophy rental homes with bells and whistles don’t make money; average homes do. So the key is to keep your rental home average and undifferentiated? That doesn’t sound like good marketing, does it?



Don’t get me wrong, these would be very nice improvements that would make the rental move faster. My issue lies with 2 things:

1. The ROI

2. The way to effectively market the increased value in the internet age



The question should not be “Would the tenant like these improvements?” Of course they would! Who wouldn’t?



Rather, the questions should be:

“Will the tenant pay for these improvements with increased rent?

“Will the market allow us to raise rents to cover and profit from these expenses?

“Can we effectively communicate this increased value in our marketing?”



The first problem is the ROI. In short, if you pay $2K to install granite countertops, how much extra rent can you charge? The answer is between slim and none. And slim just left the building. The reason? If your home is priced out of the market, no one will go look at it. And if they don’t go look at it, they can’t see how awesome your improvements are. Pictures only go so far.



The second reason is that it is too hard to effectively communicate extra value in rental homes; attention spans are too short. People look for rental homes on the internet and are clicking between hundreds of them. The main things people are looking at are price, number of bedrooms and bathrooms, and the areas in which the homes are located in.



So as potential renters are clicking expediently through homes, they notice your home is listed at $1,500 and another similar rental is listed at $1,350. Guess which one they click on? Yes, the cheaper one.



"But I have electricity, lawn care and cable included! They would save money ultimately by taking my property instead of the one for $1,350!"  Yeah, that’s probably true. But to learn that, they need to read the house remarks thoroughly and be a math major (and also know the typical bills that utilities in your area run). That’s way too hard.



The “Golden Rule” worked because it was simple to figure out. To move your rental profitably, keep your rental pricing and improvements simple as well!

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: Importance of Getting Paid from Rentals in the Next 5 Years

“Go to where the money is.” (Business Axiom)




According to an article in Barron’s this month, the future of the real estate market is in rentals for the next five years. Most real estate agents are hoping this news is akin to the Bush White House claiming the existence of Iraqi weapons of mass destruction (WMD); hopefully, it is just another example of faulty American intelligence.



However, the supporting information for a rental uptrend (as well as brokerage to be on a continued, extended downtrend) is pretty compelling; if this is what is going to happen, then anyone in the field of residential real estate needs to start thinking about how they are going to operate in this type of future. And then think about how they are going to operate in a rental-dominated market.



And let me clarify. When I say “how to operate”, I mean “how to make money” and “how to stay employed in the real estate industry.”



With rentals, this means creating:

1. Quantifiable value

2. Your fee structure

3. A narrative to explain why you should earn your fee



So what does this look like? What is the quantifiable value of a rental tenant? What is my fee? What story (narrative) am I telling to back up my fee? An example:



If I bring a tenant paying $2K/month and they sign a 2-year lease, I just created $48K (24 months X $2K/month in rent) in future cash flows for you, Mr. Owner (this is the quantifying the value). What is this worth? 10%. Why? How about because that is what the commercial agents charge for leasing fees (the narrative)? If so, that’s a $4,800 commission to you.



A tried and true business model in any industry is to take a percentage of the money you bring in. It works for hedge funds (they take 20% of the money they earn for their client off the top), real estate firms, and any other commissioned salespeople.



So, to recap:



1. How much money are you bringing in to your client? (total quantified value)

2. What percentage of it is your fee? (your value)

3. Why? (the narrative)



Those that adapt will survive!



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.