O.K... here's the post where I will share what I think should be the future of rent-to-own (also referred to as lease-to-own or lease/purchase).... an intelligent alternative to a problematic area of real estate.
As stated in my most recent blog entry (below), there are several reasons people seek to do a rent-to-own, and it's not all related to bad credit or irresponsible financial choices. But, whatever the reason, I utilize a responsible alternative what is truly a win/win for buyer and seller.
My program prequalifies applicants based on income, not credit scores. We do review the credit report and credit scores, but it's not how we qualify people. Once we verify the applicant's income, we can establish a "price range" for people to shop in. Not everyone qualifies. If they don't make enough income to purchase a decent house in our market, we can't help them. You wouldn't believe the people who call off of rent-to-own ads thinking they're going to get a great house for cheap and all the rent goes toward the purchase. It's not going to happen. I have people who want to spend $450 per month to buy a house. That will barely get a crummy apartment and certainly won't buy a decent house. It might buy an old manufactured home on leased land but, as I explain below, we don't deal in manufactured homes for the rent-to-own program. It doesn't work.
I advertise lease-to-own properties every day. The easiest way to explain it is to give a sample conversation with a caller to illustrate how I do lease-to-owns:
Phone: Ring-a-ding-ding (or in my case music to "Take Me Out To The Ball Game")
Cool Carol: Hello. This is Carol
Wanda WannaBuy: Do you have any rent-to-own homes in East Wenatchee (as compared to Wenatchee or other surrounding cities).
CC: Yes, I have over 37 homes to choose from in East Wenatchee.
WW: REALLY? How much do they cost?
CC: I have rent-to-own homes in all price ranges starting at $110,000 on up to over $300,000
WW: Can you send me a list?
CC: No. First, we need to pre-qualify you for a price range. I am assuming you want a rent-to-own home because you can't qualify for financing at this time. Is that correct?
WW: Yes. I went through a divorce, and my ex-husband spent all of our money and ruined my credit
CC: O.K. We can deal with that. Let me summarize how the program works, and if it sounds interesting, I will have you call the guy who pre-qualifies buyers for me. Does that sound good?
CC: We qualify you based on your income, not your credit score. Once you are pre-qualified for a price range, you and I go out shopping for a home. You can pick any home you want (that is listed for sale) in your designated price range.
WW: REALLY? (They get very excited about that)
CC: Yes. Once you pick the home YOU want, I have an investor buy the home for you, and they (the investor) put you in the home on a two-year (pre-arranged) lease/purchase agreement. Two years should be enough time for you to get your credit straightened out, right?
CC: I will tell you, though, my investors will not buy manufactured homes. They don't buy manufactured homes because they do not appreciate in value as quickly, or at the same pace, as regular stick built homes. We want you to be in a home that will appreciate for you in the future and you can build equity. Does this sound like a program that might work for you?
CC: O.K. Would you like me to have the guy who pre-qualifies my buyers call you or would you like to call him?
WW: I will call him
CC: O.K... here is his number. Blah-Blah-Blah
So, that's my initial conversation with them. The ball is then in their court to call my pre-qualifier. They will either call the guy who pre-qualifies buyers or they won't. If they don't it's probably because they know they don't have enough income to qualify.
But, I also have people call who make $3500 - $8,000 per month. I can help these people. I won't go into all the details, but here are the highlights of the actual lease/purchase agreement. The lease/purchase agreement is for two years. One year is not long enough for most people. When they enter the program, they pay a $1500 retainer. This does not go toward the purchase price. It is for on-going support. The buy-out price is 110% of the investor's purchase price. I negotiate the best price possible upfront for the investor and provide comparable sales to justify the purchase price.
So, considering we are in a market appreciating at 16% per year, this is a great deal for the buyer. It could even work at 5%. Anyway, theoretically, a home purchased for $150,000 would be worth $198,000 in two years. The buy-out price is $165,000. The lease/purchase buyer should have $33,000 equity in the home when they go to get financing. This could cover their down payment AND closing costs... AND it's treated as a re-fi because they've been living in the house for two years.
The lease/purchase buyer's payments are based on a formula that pays all of the investor's acquisition costs.... mortgage, taxes, insurance, ROI for downpayment, etc. It's just as though they are buying the house themselves... but using the investors money and credit. Of course, the house isn't in the tenant/buyers name yet, but they get to accumulate appreciated value during the lease period, so it's easy to finance.
The rest of the story and the key to the exceptional success of the program is the tenant/buyers must agree to enter our credit consulting service. The credit counselors go over their credit report with them and outline a plan to get them on track so they can pay-off debt, raise their credit scores (or whatever the issue is) and be ready to finance within two years. They can buy anytime within the two year period. If they buy early, say after one year instead of two, they get a reduction on the buy-out price because the investor doesn't have his/her money tied up for so long.
Does all of this make sense? Can you see how this is a good alternative for rent-to-own buyers? We have over an 80% success rate with this program and, in my opinion, it's because we don't let people get into more than they can afford and we make them accountable to do the things they need to do in order to get financing when the time comes.
You may wonder how I am able to easily get investors for this program. In a future blog entry, maybe I'll discuss how this is a good program for investors to participate in. I truly do have lots of investors waiting to buy houses for my rent-to-own prospects. The investors don't make money during the lease period, but at the end on the buy-out, so their incentive is to make it work for the tenant/buyer. 10% doesn't sound like much profit for two years... but it's all in the leverage.
More next time...