Getting Real with Your Buyers on the Reality of Continuing to Rent
How many of your buyers over this past year took a look at rising interest rates and rising prices and decided to rent for another year? Based on my conversations with my ENCORE coaching clients, I would say it is at least half of you reading this article.
Do you have the tools at your fingertips to handle this type of objection? If not, I would suggest you fill that toolbox right away. I am guessing that in most situations, you know in your gut that renting isn't financially the way to go in terms of building long-term wealth, but do you actually say that? And more importantly, can you show them?
When a potential buyer - someone who was looking forward to actually buying and taking the financial steps to do so - says that they should just rent and wait, what are they really saying?
- "I am more secure with the situation I already know."
- "I am afraid of making a financial mistake."
- "I am concerned about my expenses."
Of course, there is a fine line between providing information and pushing someone outside their comfort zone irresponsibly, so let me be clear that I am suggesting the former versus the latter. However, saying something like, "I respect where you are coming from and this market has shaken up the plans of many buyers. Can we set up a meeting so I can show you some information? I want you to have what you need to make a fully-informed decision."
Although you don't have a crystal ball and the market can change in unforeseen ways, you can use your experience and expertise to raise doubt in the financial feasibility of their decision.
Five Tools for the Buying-Wary Renter
Below are five tools that you should have to discuss with a buyer who has decided to forgo buying and rent instead:
1. Equity and Time
Many buyers don't quite fully grasp how much real estate appreciation will help them build wealth. They are used to looking at the financial picture in front of them, but not a look to the future. There are two tools here that can help:
Buying vs Renting Over 5 Years: For this tool, you need to know how much the buyers were planning on spending on a house, determine the monthly payment including principal and interest and the duration of the loan. You also need to know the approximate amount they are paying for rent. Then, look ahead per year for the next five years. How do their payments change when renting vs buying and who actually gets wealthy as a result of their payments?
The below table assumes 5% rise in rent and home price appreciation each year. The purchase includes a fixed-rate mortgage with 8% down, 6.5% interest on a $400,000 home, principal, interest, and $100 private mortgage insurance only.
In the above scenario, with rent continuing to increase 5% per year and with home price appreciation at 5% per year, renters miss out on growing equity while making their landlords rich.
If you want to work these numbers out for yourself, Club Zebra members can download the NEW Rent vs Buy Calculator here.
Raising Rent: Once you have their approximate rent from the previous exercise, show them how much rent could go up based on what is appropriate in your area. Could rent increase 5% per year? How about 10%? We are seeing some big increases in high-demand urban areas. Again, it isn't about what they are paying now, it is about having control over what they might be paying in the future.
I have even heard of rents rising by over 20% in some urban with less than three months of notice given for month-to-month rentals (check for required timeframes in your locality) and ask your buyers what they would do if their rent went up that much. Of course, this is not applicable in all areas such as areas with rent control, so only ask if appropriate.
2. Saving for a down payment
Saving for a down payment is also a situation that is not on the side of those who wait when prices continue to rise. Imagine the buyer wants to avoid Private Mortgage Insurance, so they are striving to save 20% down. Their initial goal was to buy a $300,000 property, so they were trying to save $60,000. Let's say they were going to take another year to save the final $20,000 they needed to reach $60,000. However, in that year, prices rose by 10% and now not only do they need to save another $6,000 to make their ideal down payment, they have missed out on the appreciation for that year, so waiting actually cost them $36,000. If private mortgage insurance costs somewhere between $100-$200 a month they still wound up at least $33,600 short.
3. The Role of Interest Rates
You should have a loan and mortgage payment chart at your fingertips, but if not, Club Zebra members can download The Danger of Waiting here. Although you might think this document actually makes the case for waiting until rates come down, what it can also do is make the case for not playing interest rate roulette.
For example, for a $400,000 loan on a $500,000 house, the difference between 6% and 6.5% is $130 per month. If a $500,000 home increases in value 5% during its first year, that is a $25,000 gain in equity versus only $1,560 more paid in interest. Waiting, in this scenario, could have cost the buyer $23,440.
4. Finding the Right Mortgage
If the buyer has only visited one or two lenders, perhaps there are other mortgage options out there that might be a better fit, at least to get the buyer into a property. Remember, they can always try to refinance later (but be careful not to tell them they can always refinance later – because you don't know what they will or will not qualify for then).
Examples of different programs include:
- Longer terms: Yes, there actually are 40- or 50-year mortgages out there
- Adjustable-Rate Mortgage vs Fixed Rate Mortgage
- FHA, VA, USDA loans or other loan programs
- First time homebuyer grants – check locally and with your state
- Closing costs: Can the buyers ask the seller to chip in?
5. More Affordable Product
Your potential buyers, like all potential buyers, have a dream property in mind. That dream property may not align with their new financial reality, but the new reality may be a good alternative. You won't know, however, until you get into the MLS and find some alternatives and show them options. Here are three ways to get creative:
- Expand Your Physical Search Boundaries: Don't just show on a map, indicate some type of context. For example, can they save by going to an adjacent neighborhood which would be one bus stop away or add a few minutes to the commute? By talking through potential objections to the change in target location, you can help them problem-solve.
- Change the Property Search Parameters: Perhaps something a bit smaller, with a different layout (such as two-story versus one-story), a condo, townhome, or a different number of bedrooms. Again, don't just talk to them about these options – actually pull up listings with photos and talk through the challenges and benefits.
- Find Product that is Sitting: Now is a good time to take a hard look at inventory that has been on the market a while, most likely a result of an overpriced seller, and see if there is anything that is worth taking a closer look at and making an aggressive offer.
Did you know I just did a search in NWMLS using the term "motivated" in broker remarks and found 228 active listings – some of which had their last price reduction six months ago? I am seeing listings that say, "Bring any offer", "any offer will be considered", seller "will pay for interest rate buy down", "will help with closing costs/credit for repairs", "open to seller concessions", "relocating out of state". You can't tell me there isn't an opportunity for buyer and seller collaboration here.
Other Things for the Would-Be Renter to Consider
Your conversation with the buyer-turning-renter should also address some of the other pros and cons of renting vs buying including:
- The emotional side of owning their own place
- The costs of home maintenance, property taxes, insurance, etc – so they understand the full picture
- Possible tax savings when owning vs renting – they should ask their accountant
- Flexibility vs putting down roots – job situation, landlord may decide to sell, availability of rentals in the area
The Bottom Line
Don't just roll over and play dead when your potential buyers say they would rather rent. Get your toolbox together and give them the information they really need to make the decision unless you know in your gut that renting is the right choice for them. With all the examples above, it is important to actually show details and examples. If there is a loan program out there that could be a good solution, don't just tell them about it – show them how it could work in their situation or contact the lender for an example. Don't give them more work to do – simplify the path ahead of them, give them examples, show them the math, and then let them determine their next step.
As their agent, you are a steward of their finances, so speak up if you feel they are making a mistake. Even if they decide to rent, you will have spoken your truth and given them great information.
By Denise Lones CSP, M.I.R.M., CDEI - The founding partner of The Lones Group, Denise Lones, brings nearly three decades of experience in the real estate industry. With agent/broker coaching, expertise in branding, lead generation, strategic marketing, business analysis, new home project planning, product development, Denise is nationally recognized as the source for all things real estate. With a passion for improvement, Denise has helped thousands of real estate agents, brokers, and managers build their business to unprecedented levels of success, while helping them maintain balance and quality of life.
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