"They wouldn't come down in price. I said, ‘Sir, excuse me, sir, do you want to know how many other houses my client can buy?' We couldn't bridge a gulf of $2K and the deal fell through. Their loss!" (Indignant Charlotte Realtor)
"Why ask why? Try Bud Dry." (Old Anheuser-Busch slogan)
If you were offered both of these jobs, which one would you take?
Job #1: $80K annually
Job #2: $30K annually
Duh, the $80K one.
Now let's look at the job descriptions:
Job #1: Work begins at 4 AM. Your job is to produce 100 widgets an hour. You cannot go home until you complete 1,500 widgets a day minimum and your job is six days a week. There is no overtime or hopes of advancement. Your boss will ask you to complete menial tasks for her during the day, which include errands and hand-feeding her. She weighs in excess of 350 pounds, so your trips to McDonalds are frequent. She prefers you to keep your hands greasy from the fries for the post-meal kneading of her feet.
Job #2: You are forced to transfer to an exotic island with your family. All expenses are paid, which include a personal chef. You have one mandatory work day per week which includes giving feedback on the company's 4-star chef's new dessert menu. The rest is free time in which you can visit any of the many island attractions at no cost as an employee of the company. Most of the employee training manual is about avoiding sunburn and the importance of frequenting island restaurants.
Do you still want the "$80K one"? The "$30K one" is looking pretty good now. You'd be making less, but the terms are so much better. And terms are endearing!
In life, and in real estate, terms can be more important than price. But negotiating terms is hard! Why? It is simply because it becomes a much more involved house sale. You need to know what is important to your client, which means you have to talk to them a lot and probe. The agent on the other side of the deal must also do the same thing. Then you must come together with the agent (even if you don't like them) and hash out what is important to both parties and creatively put together a deal.
This rarely happens. The market had been so good for years that it has been easy on Realtors. You just need to stick a price out there within market price parameters, get an offer, wait for both parties to give a little on price, and then come to a deal. It's actually thrilling to see where the price will wind up after counter-offers continually switch hands, but it is sort of a primitive method. The assumption is always that price is king.
With less financing available and more competition for buyers, listing agents are going to need to truly understand the needs of incoming buyers. Price is price and will always be important. But the battle for sellers that can't (or won't!) reduce price has to be made on terms.
What exactly are the "terms" I'm talking about? It is simply looking at the buyer as a whole. What are their needs? Anything can be written into a contract. Here's an example of a buyer making offers on 2 similar houses both listed for sale for $300K:
Buyer scenario: They love the house, but don't want to move in until their kids are out of school (which will be in 4 months). They would like hardwood floors downstairs. They have another child on the way (they're moving for more space) which means they also need a bigger car. Because of the economy, they haven't been on a family vacation for 3 years; now with this house purchase, they are looking at another 2 years of "staycations."
Ordinary Seller offers to accept: $290K
Creative Seller offers to accept: $305K
AND a willingness to push the closing date for 3 months later (with a larger earnest money deposit). Their cousin, Tony, does great flooring work and will put hardwoods downstairs in for them at cost. They've been looking for an opportunity to get rid of the minivan they have (the kids are out of the house- that's why they are moving to downsize) and offer it to the buyers (with an increase in purchase price). They also own a beach house which they offer to the buyers at no cost for two weeks this summer.
Which deal does the buyer take? For $15K less, it better be the $290K deal, right? Or, maybe not?
Terms are endearing; price is not always king. Be unique and fight the battle on both fronts!
What is the best creative deal you've ever put together that trumped a higher-priced offer?
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. For a FREE subscription to "Charlotte Property Management Weekly" via RSS, click here. Or by e-mail, click here.
"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.
"I can't do lease options. They are way too risky!" (Concerned Charlotte Realtor)
"That's why it's a short cut. If it was easy, it would just be the way." (Paulo Costanzo in Road Trip)
"It ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in introducing a new order of things, because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new. The coolness arises partly from fear of the opponents - who have the law on their side - and partly from the incredulity of men, who do not readily believe in new things until they have a long experience of them." (Machiavelli in The Prince)
Risk, or implied risk, is an interesting thing (or a great board game that my brother would destroy me at when we were kids). Risk brings fear, and fear is scary, right? But risk is also a great motivational tool. I mean, what would history look like if the characters didn't take risks?
Life is about taking risks; so is business. And so is real estate. I was talking to a friend of mine who owns a business and he said something to the effect of, "My lawyers tell me a lot of things they don't want me to do. Some I listen to, some I don't." I was in a real estate seminar recently and one of the presenters harped on that rental contracts need to make sure to include what would happen to the renters if the house burned down. I mean, give me a break. What are the odds that a house burns down? You need to pay a lawyer to write this into a contract? What about if a helicopter crashes into the house instead?
Maybe it's the whole McDonalds thing. They got sued because someone burned themselves after ordering coffee from them that was hot (shocking!). This person did not sign a disclosure, prior to receiving it, saying that they understood the risks of drinking coffee. Out of the trillion cups of coffee McDonalds has served since it opened, this was an issue one time. If McDonalds had to disclose every risk a customer undertook while visiting their restaurants and eating a happy meal, no one would ever have time to eat there. Yet how many billions can they claim have been served successfully in the last 50 years (without incident)?
If coffee is risky, it has nothing on what I've heard about lease option (rent-to-own) contracts! I never knew so many things could go wrong! I thought it was just people renting a home, and then trying to get qualified to buy it from the seller. If they didn't buy it, they just moved out at some point. But the risk of rent-to-own, versus "regular" real estate transactions, has apparently reached a level known as "crazy dangerous." (Think parachuting into a Taliban village wearing American Flag pajamas)
Aren't riskless transactions a myth? Think about it. Buying and selling a home should be relatively riskless, right? I've never heard any Realtors say that closing brokerage deals was something to be concerned with. But... what about the houses that sold for $1M a few years ago and now sell for $400K today? That sounds pretty risky to me; risky to the tune of $600K of lost net worth.
Before I get a bevy of Realtor hate mail, I don't think that this was the Realtor's fault at all (I'm a Realtor!). My point is that every transaction has risk for someone at some point. Warren Buffet is considered one of the greatest investors who ever lived. However, if you invested your money with him in 1974, you would have lost almost half of it! In 1990, you have lost almost a quarter of it! You could have safely put your money away in US treasuries for 2-3% a year instead. Why would you take on the extra risk (potentially losing half your money- gulp!) and pay Buffett's management fees on top of that?
It's because we want to do better than barely beating inflation. Your clients want to do better than have their house sit on the market while they bleed money every month. They want a professional, like Warren Buffett, to use his tremendous ability to maximize their assets. Isn't this why your client hired you? Then why is a lease option (or some other creative sales tool) "out of the question"?
Professionals know there are always risks. But professionals educate themselves so they can mitigate them and offer (almost) all of their clients a better return than playing it the safest.
"Take calculated risks. That is quite different from being rash." (George S. Patton)
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. You can follow his Twitter thoughts on the Charlotte real estate market by clicking on http://Twitter.com/BDFRealty. He is the author of the FREE E-Manual entitled "How to Rent-To-Sell Your Own Home" (http://www.RentToSell.com/RTS-Book.html) which details how to get the most potential buyers to your home in this challenging real estate market.
"I'll always do what's in my client's best interest." (Dutiful Charlotte Realtor)
"...That new technologies replace existing ones because they are cheaper and more consumer-friendly." (Harvard professor Clayton Christensen on "disruptive technologies")
"...The Indianapolis Colts opened as a four-point favorite to beat New Orleans in the Super Bowl." (Yahoo Sports, 1/24/10)
Super Bowl time is here which means there will be rampant speculation about which team is better. Most people from Indianapolis don't think there is anyway Peyton Manning will let them lose, while New Orleans fans think that destiny is on their side. Of course, no one knows exactly who is right, but that doesn't stop them from arguing about it non-stop for two weeks.
One way to try to figure out who will win is to look how they played in the regular season and equate this to who has the advantage if the game is played a certain way. For example:
The point is that different circumstances will favor a certain team's strengths, thereby giving them the advantage.
The same methodology can be used when helping a client figure out the best strategy to market their home. If the:
Just as different game situations favor a certain team's strengths, different client needs favor different sales methods. One size does not fit all! Great agents know this and strategize accordingly- that is why their clients love them!
My prediction: Saints 31, Colts 21. Happy picking!
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. You can follow his Twitter thoughts on the Charlotte real estate market by clicking on http://Twitter.com/BDFRealty. He is the author of the FREE E-Manual entitled "How to Rent-To-Sell Your Own Home" (http://www.RentToSell.com/RTS-Book.html) which details how to get the most potential buyers to your home in this challenging real estate market.
"Straight sale or no deal." (Charlotte Realtor when presented with a rent-to-own offer)
"There's nothing like playing with house money." (Las Vegas Credo)
Oh, it has been difficult finding Realtors who want to deal with rent-to-own prospects for their listings for sale. Some won't call you back. Others will take offers and then not respond to them. Some will tell you that their clients are not interested. Then others will ask for the world: 10% down, first and last month's rent, and a rent premium of 20%, and the closing within 6 months (if they had this, would immediate financing be an issue?).
But, as Tupac said, "I ain't mad at cha. Got nuttin but love for ya." I view the reluctance of Realtors to enter into rent-to-own deals as more of an issue that needs to be corrected from my side of altar. If I was presenting rent-to-own better, Realtors on the other side of the transaction would be eagerly calling me back. I honestly believe that almost all Realtors want to do the best thing for their clients. However, my presentations are not addressing the lingering uneasiness they have. More specifically, I am not showing them the:
First of all, let's address the value objection. In the book, "Negotiation Genius" by Deepak Malhotra and Max Bazerman, they have a 5-step framework for a successful negotiation. The first step is "Assess Your BATNA." OK- done. Next step is...
Wait! What the heck is a BATNA? BATNA is the acronym for Best Alternative To Negotiated Agreement. Or in layman's terms, if this deal doesn't work out, what am I going to do instead? Everyone does this mentally to a certain degree in their head without thinking about it.
Example: OK, Mark just asked you out. Do you say "yes" and go out with him this week? He's average looking and needs to trim his nose hair, but he seems sort of funny. If you say "yes", you've got a date (and a free meal) on Friday night. If you say "no", you might be sitting at home alone (again) this weekend watching TV and listening to your friend, Molly, complain about her awful life for an hour over the phone. Oh geez, it could get worse; Molly might feel inclined to stop by if she knows you'll be home...
So either you can go out with Mark and complete the negotiation with an agreement (a date), or turn him down. Your BATNA would be to stay home, watch TV, and try to dodge Molly.
But this is life! It could get even more complicated- who knows? Mark's friend, Hot Dan, might call (improbable as it may be...) and ask you out. If you go out with Mark, that would destroy your chances with Hot Dan. But is he really going to call? You heard he likes Suggestive Suzy. Decisions, decisions, decisions...
This is the same exact scenario for a rent-to-own offer. Right now, your client has a vacant house on the market; they are losing money as they have to pay two mortgages (vacant home and where they live now). For this example, let's say the payment on their vacant home is $2K/month. The hope is, of course, that the wait is worth it and they sell their vacant home in the near future. Let's analyze the negotiation:
Offer: Rent-to-own tenant offers $4K option fee down, $2K/month, and wants to buy the home at the market price within two years.
Seller BATNA: Continue to pay $2K month and wait for a coveted buyer who will be bringing a below market offer.
Rent-To-Own Buyer BATNA: Look for another suitable home out of the 10,000+ homes on the market that are vacant.
However, what about if there is an agreement reached?
Agreement: Seller stops having to make a $2K payment every month and realizes a potential NET GAIN of $96K!! Instead of paying $2K a month, they are receiving $2K a month. ($2K + $2K = $4K X 24 month lease = $96K!). Don't forget the $4K option fee payable to the owner which ups the net amount to a cool $100K! Rent-to-own buyers get an opportunity to build their credit, accrue a down payment, and begin building a life in a home that will be theirs. Everyone wins.
Before you say it ("But rent-to-own tenants never buy!"), let's say that they don't and move out at the conclusion of their lease. It's now spring of 2012 and the market looks a whole lot better, doesn't it? Maybe you can list the house for a lot more in a much better sales market?
Know your client's BATNA and act accordingly! Maybe on second thought, you may want to take that date with Mark (to avoid Molly) and forget the roving-eyed Hot Dan who never seems like he'll settle down. Mark's lonely, you're lonely, why not get together?
Next week's article will cover how to build incentives into a rent-to-own transaction for your favorite person- you!
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. You can follow his Twitter thoughts on the Charlotte real estate market by clicking on http://Twitter.com/BDFRealty. He is the author of the FREE E-Manual entitled "How to Rent-To-Sell Your Own Home" (http://www.RentToSell.com/RTS-Book.html) which details how to get the most potential buyers to your home in this challenging real estate market.
BDF Realty is Charlotte's most innovative property management company! We provide long-term and rent-to-own tenants, sell "Homes with Tenants", and specializes in the Rent-To-Sell method of home-sell
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