Charlotte Property Management Weekly: Rent-To-Own: Why Locking into a Home Price Today is a Brilliant Bet
“You want me to lock into a price today on a house that could be worth $30K less in two years? You’re crazy!” (Potential rent-to-own tenant)
Human nature is a funny thing. There is a herd mentality that seems to be so tough to break. If everyone is buying, then it is the time to buy. When everyone is selling, it is time to sell. When everyone is doing nothing, it is time to do nothing. And so on.
The shrewdest, and consequently, richest investors do the opposite. Examples:
1. “I buy straw hats in the winter.” (John Paul Getty)
2. “The time to buy is when there is blood in the streets.” (Wall Street Mantra)
So, basically, the idea is to buy low (and when no one else is) and sell high. That makes sense to me. Let’s see how this translates into rent-to-own deals being formulated today.
Rent-to-own home transactions (aka lease options) have become in vogue in the past year or two since the banks stopped lending to a large part of the public. Lease options allow tenants to lease the property, while buying an “option” (aka the contractual right) to purchase the property at a locked-in price sometime in the future (typically anywhere from 1-3 years). So, in short, the rent-to-own tenants rent and can buy the property at a pre-negotiated price anytime during their lease period. It’s pretty simple.
The purchase of the option (cost: typically 1-5% of the home’s purchase price) is a sticking point for some tenants now; I would argue that it is the best, and most vital, part of the deal for people who want to be homeowners, especially now. Why? For a few thousand dollars, the tenant gets:
1. Peace of mind: the owner cannot sell the property out from under them, nor jack up the purchase price at the last minute
2. Financial flexibility: the option can be exercised (aka the tenant purchases the home), or not. So the house can be test-driven for a few years and the tenant can choose to buy it if they like the price of the home; if not, they can keep renting or move-out. Let’s take a quick poll: how many people who bought homes in the past 5 years wish that they bought an option (with the ability to walk away hassle-free from the house) instead of actually purchasing? Let’s see… a few thousand dollars to buy an option or the home value dropping tens of thousands of dollars minimum with no escape clause. Your call.
3. Home flexibility: the tenant can make upgrades, paint rooms, and basically make the home their own. They don’t have to ever move out, if they choose.
4. A brilliant bet on the housing market
What? What’s with point #4? Lease options equal a tenant bet? No, not just a bet, but a great bet. A brilliant bet.
The housing market is in flux. There has been a prolonged historical drop in home prices that is trending even lower. People are scared. The crowd is not buying homes. There is blood in the streets. Wait- could this be the time the great investors would be telling you to buy?
Of course. The housing market is really low. Through a lease option, rent-to-own tenants could buy an option to lock into a depressed home price today that would be exercisable for the next several years. And the option would cost only a few thousand dollars, and has a huge upside for profit when the housing market recovers.
Break away from the crowd! Use lease options for brilliant financial returns!
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!)
Learn MoreCharlotte Property Management Weekly: Rental Home Walk-Throughs: 4 Ways to Protect Yourself
“You know you have a good compromise when both sides are slightly unhappy.” (Many Authors Credited)
As a Charlotte property manager, my least favorite part of the job are the end-of-lease walk-throughs; that is, when the tenant moves out, and we visit the property to check out its condition. If there are damages, we need to decide whether they are “normal wear and tear” (no charge to the tenant) or damages that need to be repaired from the tenant funds. It’s very subjective.
There are three scenarios when it comes to these property manager walk-throughs. The house is left in:
1. Great condition: The tenant gets their security deposit back and the owner doesn’t have to pay much to get the home in market shape. Everyone is happy.
2. Mediocre Condition: Some of the damage is normal wear and tear, and some of it was caused by too much rough play by the tenant. This is where the greatest conflicts occur between owner and tenant.
3. Poor Condition: The security deposit is basically conceded by the tenant. They know they don’t deserve anything back and hope that there is no future contact concerning the property. The owner is able to use the security deposit to mitigate repair costs.
I’m going to focus on the most challenging situation, the home left in “mediocre condition”. This can elicit two different responses from the same walk-through report:
Owner: “You’re killing me! That tenant treated my home like a kid’s tree house and they are only being charged $500 for damages? Add a zero please! They should be put in jail! Did they ever think to cover the food in microwave so it didn’t erupt all inside of it? Did they decide to save money on towels and wipe their hands on the walls? The carpet was new when they moved in! You’re being easy on them! You represent me, remember? Why do you like them so much?”
Tenant: “You’re killing me! I treated that home like my own! I cleaned it daily. We took our shoes off when we were inside (which we shouldn’t have even bothered with, being that the carpet was shoddy-looking when we moved in- I told you this!! Remember??) There might have been a couple things wrong, but I could have fixed them for like $50! $500? Are you crazy?? I thought you liked me! This is highway robbery! You’ll be hearing from my attorney!”
Property managers are really trying to do the right thing, but are stuck in the middle of competing interests. It’s sort of like being friends with both the wife and the husband when they are in the midst of a divorce. You want to be friends with both (like usual), without either of them feeling slighted. Practically-speaking, that can be tough to do!
To make this experience as clean and easy as possible, I’d offer the following four suggestions to landlords:
1. Trust your instincts- there is no “right” answer and it is usually impossible to make both parties entirely happy
2. Be specific on damages and document repair costs
3. Have a consistent methodology on how costs are assessed
4. Take pictures or use video during the walk-through so tenants can see the damages they are being charged for
Though rental home walk-throughs can’t always be pain-free, there are ways to limit potential fall-out from this necessary part of the property management business.
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!)
Learn MoreCharlotte Property Management Weekly: Tenant Stories Often Raise Red Flags
“If you have to ask how much it costs, you can’t afford it.” Maxim of the Wealthy
“If you have to ask for a payment plan for the home’s security deposit, you can’t afford it.” Maxim of the Intelligent
We are approached by potential renters a few times a month with something like the following:
“We love this house! We want to take it! We would call our lives “complete” if we could inhabit this home with our children! We get goose bumps just imagining the daily ingestion of pure beauty that permeates from each nook of this stunning domicile. We have the first month’s rent ready to put down now! Where do we bring it? We will treat this house like our very own with weekly carpet baths and loving dustings!
But… The only problem is that we are a little short on the security deposit. Will the owner accept breaking this payment into 3 months? Let the owners know we are good for it and I will be praying that they be blessed this Sunday at each of the church services we regularly attend.”
Thinking like a property manager, how many red flags come up in this beautiful soliloquy? A few come to my mind:
1. Lack of funds: I dare to call this the number one tenant screening technique; this is the collection of the application fee, pet fee, security deposit, and the first full month’s rent upfront and in full. This really is the number one way to find out if they have cash on hand. If they can pay it, they probably have money. If they can’t, they probably don’t and won’t apply.
2. Offer of the security deposit in a payment plan: This ties into red flag #1, but there is another issue. If they don’t pay it upfront, you are left with absolutely no leverage to get it after they move in. You can’t evict them because they are paying rent. Please don’t take payment plans! I’ve done it a few times (because it seems so easy and the tenants seem so sincere…), but they rarely keep up with them. Moving is always more expensive than they realize and cash was already short. They won’t give you the money simply because they don’t have to. They duped you on the front end and will now avoid your calls and hollow threats.
3. Effusive praise over a rental home: I like it that you like it, but let’s not go overboard. When you tell me that you’re going to take meticulous care of it, that’s great; but I’ve never had a tenant tell me that they were planning to systematically destroy their rental before moving in.
4. I like it that you’re into church: But I wonder why you’re telling me this when you’re applying for a rental home?
Red flags don’t mean you need to wave a white one. Be diligent in your screening process and the right tenant will come along!
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!)
Learn MoreCharlotte Property Management Weekly: Big Bank Lessons: How to Sell More by Charging More- It’s All in the Ask
It’s not how much you charge, but how you ask.
“Even in this ‘new economy’? Everyone is so price conscious!”
A friend of mine was going to Mexico and I wanted to surprise her by giving her some Mexican pesos for the trip. Being that Charlotte (drum roll, please) is the 2nd largest banking city in the country, I didn’t think it would be a big deal; I only planned on getting 20 dollars worth of pesos.
I walked into Wachovia across the street and asked for the twenty dollars worth of pesos. They said there was a $15 fee, so it probably wouldn’t be worth getting it from them. They suggested the airport, a travel agency, or Bank of America. I found it interesting that they suggested a competitor; good for them!
I walked a few blocks to Bank of America and figured I’d cut through the chase. I immediately asked the bank teller what they charged for exchanging dollars for pesos. She said they didn’t charge anything; the conversion cost was factored into the exchange rate (aka lowering it). That sounded swell to me.
The question is: how much money did Bank of America make on this transaction? I really have no idea. But they got the sale! The real exchange rate could have been 20 pesos to the dollar, and they gave me an exchange rate of 10 to the dollar. That’s robbery (of course), but I didn’t know it. I just knew I wasn’t paying a $15 conversion fee on top of the $20 of pesos!
So I thought about this in the context of a la carte real estate pricing, specifically in property management. When I tell a customer that our fee for power washing their house is a 15% “project management fee” on top of the real cost, it does not come off very smoothly. The customer feels the exact amount of our fee and how it is increasing their total cost. There is always a strange pause after this pricing explanation, but I thought it was worth it as it provided a high level of transparency on how and where we make our money.
However, can a case be made to present this differently? If power washing costs us $70, and we tell the customer it will cost them $100 to do it, that’s not dishonest. I mean, do you e-mail the Gap and ask them what the actual price the shirt you bought from them cost? Or ask McDonald’s what your soda actually cost? Of course not! You either like the price and buy the product, or you don’t, and you walk.
That conversation with no added fees goes a lot smoother. I mean, what sounds better: $100 cost with no “hidden fees” or $70 plus a 15% fee? Surprisingly, the $100! The profit margin of the first presentation method (which sounds better) is approximately 66% more! And the customers are happier and not triple-checking their monthly statement to make sure the 15% was computed correctly.
In conclusion, the way pricing is offered is important. It’s a way to have your cake and eat it too, a true win-win-win. You can charge more, while selling more, while making your customers happier!
There might be a reason that big banks generate so much revenue; they know how to ask their customers for it!
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!)
Learn MoreCharlotte Property Management Weekly: Why Your First 2 Weeks of Dating are Exactly Like the First 2 Weeks Your Rental is Listed
Early impressions can be very telling. In relationships, they can save you a lot of time and heartache.
For example, when you first start dating someone, the first 2 weeks really are pivotal. One really wrong move and it is over, right? So, it is important to pay attention and try to figure out how to stand out (in a good way…). It’s also important to figure out what they really think of you, as they usually won’t tell you outright. Do they think your nervous tic is endearing or pathetic? When you bring up your issues, are they full of concern or pity for you? Do they plan to keep you around or jettison you when something better comes along?
Here are some potential early impressions and what they really mean:
1. “She hasn’t laughed at any of my jokes. However, her over-the-top cackles at the 16-year old valet’s tasteless joke, and then the waiter’s corny repartee, seem to mean that she is straight-faced with me only. I think she cracked a smile when I told my tried-and-true “dog-napping” story (10-minutes of absolute hilarity, if you ask me), but it could have been a result of the 12 text messages she had sent and received during its duration.”
Translation: You are really unfunny (to her, at least) and she is seeking more entertaining companionship elsewhere. Save yourself money and abort this relationship (before she drives off with the valet).
2. She is mesmerized by my every word. She can recall what I said last week in the greatest detail. She tells me that I am the greatest at everything. When I was fired yesterday, she swore that was incontrovertible proof my company didn’t deserve me. She says I’m smart to keep a belly because the winter months are coming and it is actually “sexy.” Hollywood actors and models are “fake”; she likes me because I’m “real.” My annoying idiosyncrasies are “cute” and I’m “untraditionally handsome.”
Translation: Carpe Diem! She likes you. Strike while the iron is hot and lock her up while she is still in this momentary fog!
So, early impressions from dating are good indicators of relationship success. The same is true of the signs received from the first 2 weeks your home is on the rental market.
1. No one is responding to the rental ads about my home. If your home had feelings, it would be locked in a bedroom alone eating bon-bons and watching “Bridges Over Madison County” right now.
Translation: The home is priced too high, the pictures in the ad are either non-existent or awful, there is potentially no contact information contained in the ad, the ad copy is off-putting, or a combination of the above. Fix and repost the ad.
2. I’m getting a lot of showings, but no one is applying.
Translation: The home is either priced a little too high and/or its condition does not back up what is presented in the ad.
3. I’m getting deluged with showings and applications.
Good! But your home is probably priced too low.
4. Real estate agents don’t respond to my follow-up calls and e-mails after they show my home.
Translation: Your home does not back up what is in the ad; typically, it is dirty and might look like a college fraternity house or an early 1800’s boarding home. They are upset that they wasted their time (and gas) to visit your home and look bad in front of their clients.
5. Your home gets a decent amount of interest and a good application is submitted and accepted within 30 days.
Translation: Your home was priced and marketed appropriately. Bravo!
Though early impressions are never 100% full proof, they are usually on point. Paying attention to them and making adjustments early can save you a lot of headaches, heartache, and money!
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!)
Learn MoreCharlotte Property Management Weekly: Groupons & Free Property Management
I’m a big (recent) fan of these “Groupons.” What a great deal for consumers! Groupons are like regular coupons, except on steroids; they offer discounts of 50%+ to use at local businesses. I am impressed and now a big supporter.
Early last week there was a groupon for one of the top restaurants in Charlotte offering $60 worth of food for $25. What a great deal! I bought one and used it the next night. It was as advertised; we ordered the food, got the check, and gave them the groupon coupon (I’m a poet and don’t even know it). They took $60 off the bill and we left without any police following.
As a consumer, I was pleased. Make that very, very pleased. However, as a business owner, my stomach turned. Why would this great restaurant agree to take such a huge price concession? Are these the type of patrons they want to attract? Why are they trying to compete on price? That’s for McDonalds and Wendy’s, for crying out loud!
I always came from the school of marketing that believed that business differentiation is achieved on 3 playing fields: quality, customer service, and price. As a business, you pick the two you want to be good at. Most (sustainable) businesses are very good at one, few are very good at two, and none are very good at three. It’s impossible to do; I challenge you to name one business that competes at all 3 (customer service, quality, and price) very well. This is what this great restaurant was trying to do (albeit it was a promotion and not normal business operations)!
I’ve seen a similar promotional tool offering months of free property management for new customers. I can certainly understand the logic as we (supposively) are in a “new normal” that everyone is talking about. Customers are price conscious and free is always better than paying, right? So most customers will gravitate towards this type of deal; it’s just like the groupon I loved, right? Or is it different?
I would argue that good property management is much different than having a meal in a nice restaurant. Sure, discounts on both are nice. But you can eat at a restaurant and leave after paying for the meal, no strings are attached. The restaurant knows that you will only come back (and pay their regular prices!) if you really enjoyed their food, staff, and overall experience. If there is some bite-back of any kind (aka food poisoning), you would never come back.
However, with free property management, you are signing a minimum of a one-year contract. You are like the Huey Lewis song, “Happy to be stuck with you.” But it’s fine because you’re not paying anything, right? Well, that’s true for the first few months anyway. Or is it? What about if the property management company does something that costs you a bunch of money, like places a destructive, non-paying tenant into your home? Then the few hundred dollars of savings from “free” property management won’t be so free. Costs of eviction, non-payment, and fix-up can really add up!
The point is that if the property management company you are looking into is offering you months of free property management (or other “groupon-like” discounts), you may want to look at what that means to their quality and customer service. No company is good at all three, and quality and customer service cost money to implement and execute! Good people are not cheap! And relationships bought cheaply are usually just that.
Saving money is great on one-time deals, like buying a great, name-brand shirt or an expensive meal from a great restaurant! But be wary when saving a few bucks initially means entering into a long-term, contractual relationship!
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!)
Learn MoreCharlotte Property Management Weekly: Do You Want Rent-To-Own With That Rental Home? CAN YOU AFFORD TO MISS OUT?
Oh, the joy of the successful up-sell! Ask a simple question many times to many customers and make a ton more money! This is what all corporations pine for:
- McDonalds: “Do you want fries with that?”
- Amazon: “7 more dollars and get FREE shipping!”
- Dominos: “Order 2 pizzas at regular price and get free cheesy bread!”
Mix in a little doubt from a good salesperson and if gets even better!
- Meineke: “Sure, you could wait to replace your brake pads for another few months, BUT IS YOUR FAMILY’S WELL-BEING WORTH TAKING THAT CHANCE?”
- Bank of America: “Sure the market has been awful. But with your money sitting on the sidelines, COULD YOU STOMACH MISSING OUT ON THE BIGGEST STOCK MARKET JUMP IN HISTORY?”
- John’s Learning Center: “Yes, your child is doing well in school and is up to his grade’s reading level now. BUT WITH GLOBAL COMPETITION FROM INDIAN AND CHINESE CHILDREN, SHOULDN’T YOU BE ADDING TUTORING HOURS FOR LITTLE JIMMY INSTEAD OF SCALING BACK?”
The same tactics can be utilized in the rental home space.
You can up-sell your renter with: “Is this a house you might want to buy in the future? Do you want to lock into a rent-to-own arrangement and start building equity now?”
And then add a little doubt with: “Yes, it will be tough getting a loan in the next year or two, but what about after that? DO YOU WANT TO MISS OUT ON BUILDING UP A DOWNPAYMENT AND CLOSING COSTS NOW VERSUS THROWING YOUR MONEY AWAY JUST RENTING FOR THE NEXT TWO YEARS?”
“Up-selling” and “creating doubt” are not dirty sales terms; they are the backbone of successfully providing customers with the options they need to fulfill their personal goals. Ever been happy about being up-sold (like when the waiter in Paris told you to try their delicious signature dessert?)? Or happy about someone planting a seed of doubt (“You may want to re-think buying that computer. It graded really poorly in “Consumer Reports.”)?
Let’s look at the facts:
Many people want to rent, but even more people want to own! The banks just aren’t cooperating for most people currently.
And most property owners in this economic environment, who are renting out their homes, are open to selling them; at least that is what the feedback I’ve been getting from clients. I mean who couldn’t use a little more liquidity these days?
Up-selling and casting doubt on the customer’s current situation creates value, rather than detracts from it. And when more value is created, more revenue can be earned!
YOU WOULDN’T WANT TO MISS OUT ON MAKING MORE MONEY HELPING YOUR CUSTOMERS MORE, WOULD 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. 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!)
Learn MoreCharlotte Property Management Weekly: Charlotte Headlines Say Real Estate Market is on Rebound? Or Not?
“There are no facts, just interpretations.” Friedrich Nietzsche
On a whole, I like honesty. I like it when people tell me what they really think (within reason). And if they don’t have anything interesting or worthwhile to say, omission works well for me too. I like things clear and easily understood.
So it came to my chagrin when I was reading a headline of an article this week that blared, “N.C. foreclosure sales drop 42%.” Wow!! 42%? That’s almost half! Is the job market trending up in our southern paradise? 2011 must be when the US economy really rebounds led by the Tarheels of North Carolina! Charlotte is ready to do its part! This must mean that home price stabilization is around the corner and real estate will start picking up and lead our country to another streak of prosperity!
But wait… I really hadn’t heard anything about the local real estate market getting noticeably better; rather I’ve continued to hear the opposite. Homes sales in Charlotte have continued to dwindle (I read another headline saying that Charlotte home closings were down 23% in 10/10 when compared to 10/09!). Well, I guess that has nothing to do with people actually staying in their homes. So less foreclosed homes equals better capitalized consumers, which equals more consumers with jobs, which equals a better economy, which equals a more robust (and rising!) real estate market? Cool!
And then I actually read the article. The 42% foreclosure decrease was due to the halting of foreclosures due to questionable bank procedures. That explains it! So, this statistic is artificial and misleading. We’ll soon see a headline in the coming months saying that foreclosures are up 42%+ to make up for the halted foreclosures now.
And now that I think about it, our firm did have some closings that were held up because of this foreclosure freeze. So what does that mean about the 23% decline in home sale closings statistic compiled from 10/10 (when compared to 10/09)? Does that make that statistic artificial and misleading as well?
The clearest answer is “yeah, probably.” Who can figure out what’s going on? Maybe this is what Wall Street legend, Peter Lynch, was talking about when he said, “The man who studies macroeconomics for 15 minutes a year wastes 10 minutes.” There are too many moving parts to get a true picture of reality!
It’s like the rock band that labors through the reading of their 2,000 word concert review in Rolling Stone magazine and only wants to know one thing: “Do they think we rock?” I just want the same type of clarity from the headlines I read.
Are things getting better or worse?
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!)
Learn MoreCharlotte Property Management Weekly: Pricing Rental Homes- List Above, At, or Below Market Value?
I have to admit, pricing rental homes is an issue that I struggle with. As a property manager in Charlotte for the past 6 years, I really should have a good grip on the right approach; however, I’m still constantly debating myself over the correct way to do it. And my therapist says this self-banter does not mean that I’m crazy.
So… it is safe to say that pricing is an inexact science. It is simply impossible to know what the optimal dollar figure is for any product or service. For example, let’s say you are a manager at The Gap (with the traditional logo intact). You put 5 sweaters on the rack for sale at $50 each. It takes 5 days and they all sell. Is this good? Was $50 the optimal price?
You’ll never know! Maybe you could have priced them at $55 each and still sold them in 5 days. Then you would have really screwed up; retail has been a tough field to be in for the past few years and the extra $25 in profit would have really helped The Gap’s stock price! Or maybe the sweaters should have been priced at $45 and they would have sold in 1 day. In this scenario, the lower profit would have been offset by the larger saving in inventory costs. But then again, who knows? Maybe at $45 each, customers would have perceived the sweater’s quality to be less and they would’ve taken 10 days to sell. It’s tough to figure out!
With rental homes, the confusion is similar. Below are the 3 pricing options available to every property owner:
1. Price Above Market Value: This is good if prospects will actually visit the rental; they may just look at the other rentals listed at or below market value. However, if the prospect visits and says they will take the place if the rent is knocked down a bit, that’s fine! The price can still be at or slightly above market value and the prospect is ecstatic they can tell their friends that they got a great deal.
2. Price at Market Value: An average amount of prospects will visit the rental and someone will take it in due time. The only issue is if the prospect says they will only rent the home if $100 is taken off of the monthly rent amount. Now the owner must decide if they want to lock into a below-market rate for a year, or roll the dice and wait for another qualified prospect. (Note: Rent negotiators usually turn out to be good renters. Unqualified or barely qualified prospects rarely try to negotiate the rental price. That takes chutzpah! It’s like getting into a bar at age 17 and arguing over the prices of shots.)
3. Price Below Market Value: Prospects will flock to the house and applications should roll in. Some people will still try to negotiate rent, but being that so many people are interested, these requests can be quickly (and justifiably) rebuffed. Locking into below market rates isn’t great in terms of ROI, but does provide the piece of mind of an occupied property with a good tenant (you can be choosy!).
So what’s the right answer? It depends. I know that’s not an overly helpful answer, but I’m not trying to be evasive. There are many factors that need to be considered besides the obvious ones (risk tolerance and financial wherewithal of the owner). Here are a few to ponder:
- If the property is 1 of 15 rentals in a neighborhood, pricing below market value could be a good point of differentiation. Conversely, if the rental is the only one in the neighborhood, it may be wise to price above market value.
- If it is probable that a real estate agent will bring a tenant in on a property, the pricing should be above market value. The reason? They will probably look to negotiate the rent down. If the tenant will probably come in from an ad, pricing at or below market value is probably the best strategy because they will be focused on the list price.
- If a downturn of activity is expected because of seasonality (like the Thanksgiving holiday through New Years), it would probably be smart to price below market value for the first few weeks of November. Having an empty house in November and December is going to kill the ROI; a rental reduction upfront in November will definitely have a better total net return than a month or two of extra vacancy.
So the moral is that pricing rental homes ain’t easy. Different times and situations call for different strategies. One size rarely fits all!
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!)
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Charlotte Property Management Weekly: The Options Available to Owners of Vacant Homes
As a Charlotte property manager specializing in lease options (rent-to-own and rent-to-sell), we get many calls from home sellers “exploring their options” about their vacant properties (unlike Obama, my puns are typically not intended). So, as a public service, I’ll run through the available options:
- Strategic default (I think this is what it is being called): Stop paying the mortgage and taking the credit score beating like a man
- Put the property on the market for sale: If the home is special and priced well, it will sell in some period of time. If not, eat the mortgage every month until the banks start lending again.
- Rent the property out: Get most of the mortgage paid every month by the tenant. Keep a tenant in the property until the market comes back and then place the home up for sale.
- Rent-to-sell the property: Put a rent-to-own tenant into the property who will pay the mortgage and potentially buy the home during their lease period.
- Rent out the property and then put it on the market: In my experience, this leads to disappointed sellers and upset tenants.
- Arson: Not recommended. And, no, this is not a service we offer!
All of these approaches obviously have pros and cons (like jail time). Depending on each respective person’s needs and tolerance for risk, each approach could be the appropriate one.
And to conclude the public service announcement, please contact your local property manager for further details.
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!)
Learn More