Rent to own - or rent to survive?

The “rent to own” scenario I have been preaching about for the past year has finally been gaining in strength, yet I continue to have some real estate professionals express concern to me about the negatives.

http://www.dailyherald.com/story/?id=300715

The above link is to still another story about how builders have begun to enter the foray. They see the same things I do. There are a number of potential buyers out there that have enough for a down payment and to handle a reasonable monthly mortgage, but do not have enough credit to get a mortgage or perhaps need a few more months to reach that point. But they would “own” now if not for those conditions.

Sellers have reasons to “rent to own”. Not only would a “tenant” cover their mortgage cost, but one with the desire and strong possibility of buying the property is going to take much better care of it on a day-to-day basis. In most cases, it frees up the seller to move elsewhere, whether a move up, down, or laterally.

Yes, I understand there are some risks on both sides. A “tenant” could suffer a job loss or a severe strain in this economic climate and have to vacate, thus resulting in the major expense of the current owner. An owner could suffer a similar economic blow and force a tenant out. Several realty agents I have discussed this with feel that these possibilities make a rent-to-own scenario too risky for them. I can understand that, even though the concern is really that the realty agent does not want this to reflect on their services if things go wrong. Yet, these same realty agents seem unwilling to negotiate an exit strategy into a contract.

If a rent-to-own tenant suffers a financial setback, he/she/they could have a 60 day out clause, perhaps forfeiting a deposit paid initially and designed to go toward eventual ownership. This would provide a period of weeks for the “seller” to either find another tenant or consider alternatives such as an auction for at least the balance of the mortgage. Depending on the amount remaining on the mortgage, there could even be room for the seller to then profit while being done with the property and yet give a fresh buyer a great deal. If an owner suffers a setback, the tenant would be covering the existing mortgage.

For builders, they see the value of having tenants in units which have already been built and cost money to maintain if no one is in them. As more of them take to this idea, it could mean the difference between builders staying in business or not to have tenants in as many of their already built homes as possible.

My message to potential buyers with credit issues is to strongly consider this possibility. Builders are worth checking with, especially since there is a likelihood of a new unit and fresh warranties. My message to sellers is to weigh the risks of being able to get out from under a mortgage and move on vs. staying in your current situation. And my message to realty professionals is to consider ways to make this system seem better so that you don’t lose your commissions to a local builder.

It appears there are potential buyers with the financial capability but without sufficient credit. In many cases, the financial capability could win out. For everyone.

What about "Rent To Buy"?

I’m looking for innovation in today’s real estate market, and all I keep getting are statistics. I call it the high cost of procrastination.

Maybe it only seems this way, but it is as though everybody is now waiting when it comes to real estate and especially home sales. Therein lies the problem. Everybody is waiting. That means nobody is acting.

Whatever happened to the saying “It takes money to make money”? People used to invest in real estate, but obviously not right now. Many who normally would are waiting to see what happens. People would invest in the stock market, but based on the amount of decline over the past few months, not anymore. Market investors are waiting to see what happens. Others would invest in CD and Money Market accounts, but those no longer pay out enough to make it worthwhile. Potential investors in CD’s are waiting to see what happens.

So while everyone keeps waiting, what happens?

Real estate will always be there. A company might not, a bank or investment company might not, but real estate will always be there. And it provides a chance to deal in the now.
Want to sell your home or a property you own? You think you can’t or won’t because of the market. That is playing the same waiting game everybody else is.

I continue to have mortgage lenders around the country tell me that they are not able to qualify a large percentage of potential buyers because of credit or down payment issues. Many of these lenders tell me they don’t want to advertise their own services because of the marketplace. And some of those same lenders have a disconnected phone number when I try them back a few weeks later to see how they are doing.

Some lenders and realty agents overlook opportunity. In the circumstance described above, it seems to me that the “turned down” potential buyer has credit and/or down payment challenges. That is understandable in today’s economy. Yet, there did not seem to be an issue with them making a monthly mortgage payment if they had better credit and/or enough for a down payment.

To me, that “turn down” could well be turning down business. That same lender and realty agent could have been helping that potential buyer find a house to rent in the range they could afford.

True, I’m making that sound easy. Wait a minute. With thousands of homes listed for month after month in just about every area, it probably is.

That potential buyer should be presented with three simple words. Rent to buy. While that potential buyer is looking to restore or improve their credit rating and/or saving for a down payment, that potential buyer could actually be living in their “new” home. If they are renting to buy, they will surely take better care and do better maintenance when they have a future stake in the home. From the seller’s standpoint, even if they don’t quite get all of their monthly mortgage back, they can move on to a different location. Maybe even downgrade to remain steady with monthly obligations. Perhaps renting elsewhere while maintaining equity in a home costing them little to nothing.

Such a “rent to buy” arrangement could include the lender and realty agent and eventually provide them with commissions. Could be on the rental or for if and when the rental turns into a purchase. This could avert foreclosures and would help the revenue for lenders and realty agents. Significantly, it would not leave potential buyers “waiting” like the rest of the people in the industry.

To be or not to be? That is the question

Those in the industry need to work a lot harder these days in order to succeed, rather than just to "survive". I get the feeling that some experienced professionals would rather give it up than pick up the pace.

First, let me ask you (the realty agent and mortgage broker) this. If you are looking at closing up shop based on the current economic state, what do you plan to do from this point? What looks like a better opportunity to you?

I contact an average of 300 mortgage lenders per week around the country that I am not currently doing business with. Over the past two months, I find an average of higher than one per day that I had contacted previously that how has or is shutting down or is already disconnected. Yet, I haven't read or heard about another industry that is aggressively growing via sales.

On the realty agent side, my feeling is that the final two months of the year will see a reduction in the number of realty professionals out there. I was working in Southern California in the early 1990's when the joke going around was "If stopped by the police, you can show either your Real Estate License or your Driver's License, whichever is handy". Agents were part-time, full-time, any time, and all the time.

As we come toward the end of the year, it will be association dues time for hundreds of thousands of agents. My gut feeling is that a sizeable percentage will look at spending hundreds of dollars (and thousands in the case of numerous association memberships) in an uncertain marketplace and decide not to renew their license. They may take the "when the market picks up I'll get back to it" approach.

I think everyone loses if that happens. Consumers will lose out if there are way fewer realty agents to choose from. The remainder will figure they won't have to work as hard and consumers will receive even less information and need to track down agents instead of being courted.

Agents and lenders will collectively throw away years of exerience and expertise, perhaps to embark into an industry they are inexperienced in and have to start at the bottom of.

Meanwhile, for those who know that thousands of home sell every month in any market, it is time to develop a creative plan of attack for the coming holiday season and to start 2009.

For example, the "rent to own" market continues to be underserved. I can't believe how very few ads I see about this concept.

Let's say you have already moved out of a house or condo and are stuck with a monthly mortgage payment in addition to the payment on your current home. If nobody is buying right now, then you need to get something toward your payment. If it were me, I would be all over my realty agent to bring me a potential buyer looking in my area who hasn't been able to qualify for what they need. (And these days, that shouldn't take more than an hour!) I would make them an offer to "rent to buy", starting off at a rent below comparable market value for a rental.

I would get them in at a very reasonable rental price for 3 to 6 months. Even if I am not making enough to cover the mortgage, it is far better than having it sit empty and getting nothing for it. Have a provision that after 6 months (or the pre-determined time frame) they can buy it from you for only a slightly increased monthly payment. This increase would bring their monthly fee up to the amount of the mortgage on this property or slightly higher. For example, if your mortgage payment is $1,644 per month, make their "rent to buy" fee $1,700 per month.

You are, in effect, providing them will seller financing. The "renters" will take good care of the place if they may own the place, along with handling some of the maintenance for you.

When the time comes and they want to "rent to buy" you can accept their down payment and go from there. If they do not wish to stay, several months will have past, giving you the chance to assess the local marketplace. You can try to sell again, find another "rent to buy" possibility, or somewhere in between.

Yet, I don't recall the most recent time I saw any advertising for "rent to own". The marketplace demands this and other options.

So if you are an industry professional and are about to pay your association dues for the coming year, now is the time to plan your approach. There is no shortage of elbow grease.