Lease Options – Investor, Tenant, Agent: Win/Win/Win?

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Within the segment of consumers who want to be homeowners, there’s a subset who cannot qualify for a loan, and will therefore not be a homeowner until they can. Typically, these folks have a credit profile that precludes them from qualifying for a loan that can work within the parameters of their income and debt. In the past, the only alternative to buying was to continue to rent while working to fix credit issues, and decrease debt (and if income happened to increase along the way – a bonus).

Today, this segment of folks have the ‘Rent to Own’ option available to them. Popular with conservative investors who want the advantages of appreciating investment property, but without the hassles of rental income, the Lease-Option is an arrangement whereby an investor leases a property to a tenant, who is also extended an option to purchase the property within a certain time frame (two years is typical in the Puget Sound market). For an investor, the Lease-Option playbook is extensive – there are multiple approaches to this type of investment.

However, a program that seems to be growing in popularity is the ‘Pick Your House’ program that agents offer potential homeowners. The scenario the agent shares with the tenant is that they can pick the house in which they want to live (as long as the price of the home – rather, the monthly costs associated with the home – falls within the tenant’s budget). The agent then finds an investor to purchase the property. The rent is structured to cover all the investor’s monthly costs (PITI). Additionally, there is typically an option fee that the tenant pays to the investor up front. I’ve seen it fall into the 1% of property market value. Though non-refundable, this fee is applied as a credit toward the purchase price should the tenant exercise the option. Sometimes, a small portion of the monthly rent is applied toward the purchase as a credit as well. The option price is calculated under certain assumptions (such as 8% annual appreciation), and the price therefore might be set at 10% over current market value at the end of two years. This allows the tenant to capture some equity upon exercise, assuming appreciation is higher. Additionally, the tenant is contractually obligated to manage small repairs (where a renter would just call the landlord), with the investor taking care of larger repairs (in excess of some agreed upon dollar amount).

It’s a good way for a potential home buyer to get his foot in the door – as a matter of law, they have an interest in the property with the option (this can and should be recorded with the county to protect the tenant’s interest).

The option can be lost if the tenant defaults on the terms of the lease, or if he chooses not to exercise the option. Here’s the kicker – I’ve read/heard that the default rate for lease option tenants hovers near 70%. The biggest reason seems to be that bad habits are hard to break. If the tenant is counseled correctly, the lease period is an opportunity to repair credit, pay off debt, and position the tenant to qualify for a loan needed to exercise the option. The reality is that tenants don’t pay their rent, continue to over-extend themselves, or decide upon a different direction with their life that requires a move.

Unscrupulous investors and scammers will take advantage of these tenants and pull the option from underneath them for the smallest deviation from the lease terms. In fact, Lease Options were outlawed in Texas due to the scams. However, if the investor enters the transaction and deals with tenants fairly, it’s a win/win for the investor and the tenant/optionee.

I am wondering about the ethics of an agent working with a tenant to pick a house, then bringing in an investor to purchase it. At first glance, it seems that there is a clear conflict of interest. Isn’t there? Maybe not. The tenant is informed and gives consent to the process from the start. The agent is there to help find the home, but the investor is actually purchasing it. However, since an option – and therefore an interest in the property – is involved, does this create a technical conflict of interest? The investor is more concerned with the profile of the tenant, and with making sure that the numbers work for the transaction. The tenant is more like a client to the agent. They are driving around with the agent, evaluating neighborhoods, and picking the home, subject to investor approval.

Are ‘Pick your Own’ Lease Option programs a win/win/win for the tenant (who may successfully purchase the home by exercising the option), the investor (who gets a fixed return assuming an exercised option) and the agent (who gets the commission from the transaction)? A fourth party, adding another ‘win’, is the mortgage broker who may very well finance the deal for the investor, and create a relationship with the tenant that leads to financing the exercise of the option down the road.

Full disclosure – as an investor, I have purchased four properties with tenants who had options to purchase. However, none of them were acquired in the ‘pick your own’ method discussed above. I acquired the contracts by paying an assignment fee.

Flaming for Ardell

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There’s definitely a tech bent to today’s list…

  1. Starting off with Niki’s interesting take on the Reply.com launch. Niki runs Homethinking, a site dedicated to letting users review agents. I had a chance to talk with him at SF Connect over a beer (or two or three) and got to learn a fair bit about his site. It is definitely worth checking out as there is a lot to the backend of what he’s doing and it is not necessarily what you might fear (assuming you’re an agent!).
  2. Inside Google talks about a fun press release from Intermedia that talks to the snarky discussions that Galen and Robbie have been having around online office applications. Tech blogger Om Malik gives his reason for not using google’s new service.
  3. Others are asking if Google services are joined too tightly? I’d be really curious to get Robbie’s take on that.
  4. Thinking of Google, Ardell, does it help that Google could could be adding 1000 people in Bellevue? (via Greg)
  5. I’m not the only one thinking of Ardell… I noticed someone trying to start a flame war on Craigslist over Ardell (look for the post title: “Get the feeling Realtors read from a script?”)… It was great to see a few people come to her defense and unlike so much of the stuff over there, the flamewar never materialized.
  6. I’m all over microformats, so I was glad to see someone write this post about understanding microformats for the non-technical web professional or marketer. Most relevant to real estate is the hListing format currently being deployed by Edgeio.
  7. Watch out when Greg’s talking about rethinking everything. 🙂
  8. Also, considering Greg’s opinion on hosted blogging platforms is not exactly private knowledge, I thought he might enjoy this comic from Chris Pirillo…
  9. The blogger from from hismove (a christian real estate network???) points out an interesting chart from the NY Times displaying the inflation adjusted home prices in the US since 1890.
  10. Not only are the For Sale By Locals people ready to launch, but these people are serious about going international. Interestingly, they will be launching their official site at a conference in Bolivia. Their temp site looks really bad in firefox, which doesn’t bode well for them in my mind, but considering the massive activity on their blog as of late, I’m definitely interested in seeing what they produce.

No Credits "For Repairs" Allowed

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This excerpt from a recent comment to an old article of mine, deserves more than “comment back” attention.

“we said we would take $5,000 for…repairs…The addendum was signed by both seller and buyer….Our lender wanted us to take the word repairs out of the contact, but we wouldn’t do it, so our loan fell through…’

Lenders do not want to lend out money for future repairs to a home, nor do they want to finance properties that need repairs. Let’s say a house needs a new roof and the cost of that roof is $7,500. Agents cannot write a contract with an addendum that says “Seller to credit Buyer $7,500 for a new roof” and expect the sale to close. Nor can the lender simply say “remove that addendum”, as if the buyer is supposed to pay the same price without a new roof or the money to buy a new roof.

Clearly this situation has come up several times in my career. Most recently, the roof was OK, but was two layers of composite over a wood shake roof, meaning at time of replacement all three layers would have to come off. Also, since wood shake roofs do not have sheathing, the new roof would have to include all new components and not just new shingles. The owner agreed to “pay” for most of the new roof and the buyer “agreed to pay” for a portion of the new roof. The new roof was installed by the seller prior to closing, and the sale price was increased to include the buyer’s share of the roof cost. Excellent resolution as the lender financed a house with a brand new roof. Everyone is happy.

Another good and often used solution, if the buyer wants to take a credit and pick and install their own roof, is for the buyer to take a credit “toward closing costs”, They simply use the money they were going to use to pay closing costs, to put on a new roof. It’s just a replacement of these monies for those monies. It satisfies the lender, as they will usually allow a credit toward closing costs, but not for repairs. As long as the appraiser doesn’t “call” the roof and require it to be done before closing, the buyer can get the monies this way.

So is Denise “bad” to refuse to take the word “repairs” out of the addendum? Or are the agents (if there were in fact agents involved) “bad” for writing and accepting an addendum in the first place, that they should have known would cause the loan to fail?

It is no surprise to me that a lender would not fund a loan that included a $5,000 credit “for repairs”. It is worth noting here, so that others do not write or accept addendums that offer credits for repairs, that send up red flags to the lender that the house is not in good condition. Perhaps it was a For Sale By Owner that Denise purchased without the assistance of agents. So to For Sale by Owners and private individuals buying from For Sale by Owners. and attorneys who assist in transactions without agent involvement, please note that generally speaking, a lender will not fund a loan with a repair credit, especially if there is little or no downpayment.

"Carpet" Credits, et al

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[photopress:w.jpg,thumb,alignright]We are at that time of year when houses are not selling like hotcakes. So we are back to that age old question, “Can’t I just offer a credit?”

Often agents will tell sellers that they need to remove wallpaper, paint rooms or put in new carpet. A common response from a seller is “Can’t I just offer the buyer a credit?” The short answer is NO. The long answer is, if you offer $2,000 as a credit to the buyer to remove that ugly wallpaper, the buyer will offer you less after having seen the wallpaper AND they will take your $2,000 on top of that as well.

So yes, you can offer the buyer $2,000 and he will happily take it. But he will still take $10,000 off the price of the house, because he hates the wallpaper.

10 Questions For Yahoo! Real Estate

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Today I got an email from Haley at Yahoo announcing their new and improved real estate site:

Today Yahoo! Real Estate announced a revamped site which includes comprehensive tools and services to help home seekers chose their dream home. Yahoo! Real Estate is now more tightly integrated with Yahoo! Search and Local, giving users inside information (like mortgages, local market rates, even ratings and reviews on local restaurants, businesses and schools) for the more than 3 million homes listed on the site.

Below you’ll find a release detailing the improvements. If you’re interested in learning more, I’d be happy to arrange an interview with a Yahoo! Real Estate spokesperson, please feel free to email or call me on XXX.XXX.XXXX.

It is really not appropriate for me to do the interview, so I’d rather turn this back on RCG readers… Are there any questions you have for Yahoo about their new site?

If you do have questions, let me know ASAP because I’d like to aggregate the 10 best questions and pass them along to Haley by the end of the day today!

Welcome to Seattle, we'll get to that in 8 years

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New Orleans is halfway done with a wireless network in less than a year (and while cleaning up after a hurricane no less!), but Seattle is thinking long haul. We’re discussing a city-wide high speed broadband network by 2015. Doesn’t it seem like such a techie city would have started on this a few years ago?

We’ve only been discussing the plan for the viaduct, our 1-in-20-odds-of-collapsing-in-the-next-ten-years waterfront highway, for 5 years now. I expect a draft viaduct replacement plan to be ready for high speed download in 2015.

Would you lie for God?

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Yesterday’s theme was PreFab, today I’m back to simply providing links to 10 interesting real estate conversations…

  1. Prosper is an online marketplace for people to lend money to other people. Shaun has been playing with Prosper and has some interesting observations.
  2. I don’t agree with Mark’s conclusions, but I think he makes an interesting case that a good time to “upgrade” is in a down market. (via Steph)
  3. For those looking to improve things before they sell, Rory provides some great home improvement links.
  4. If you are going to be upgrading (up market or down), you’d be wise to follow Noah’s advice and sell first!
  5. Will the number of sold homes rise in August as Bill suggests? But I sincerely doubt it.
  6. Todd, since you asked… My take is that if you are going to change domains, you want to do it sooner than later. You’ve still got lots and lots of growth left in your site, but the longer you wait, the harder it will get. Even better, consider getting a hosted version of WordPress that you can put under your own domain. Many hosts have made it so that there is a “one button” install of wordpress and they even manage the upgrades on the backend. (WordPress.org has a list of their “preferred” hosts.) In the long run, this will definitely give you the most flexibility with things like video/podcasts and stat tracking.
  7. Jim’s thinking he wants a sideblog plugin… I’m thinking just take notes and when you get to 10, hit publish. Have you noticed? 🙂
  8. Fran is good for providing a useful tip every few days… Today it is about the importance of the buyer walkthrough.
  9. Jay Thompson (of AZ) gives us a “pick of the week” that includes one hell of a house!
  10. Larry Cragun tells us to watch out for real estate transactions involving religious institutions. Some people are more than happy to lie for God.

I’m actually shocked at the number of emails these lists have generated. Don’t people know I have a job? 😉

Top 10 reasons to ditch gMail for Microsoft

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[photopress:BringItOn.jpg,full,alignright]OK, you knew I had to respond to this. I brought my flame proof suit. I used to work on Exchange, Outlook and Outlook Web Access when I was a ‘softie. Galen’s last post was very Roeper, and I’m going go Ebert on him. I have 3 sets of 3 words and 10 reasons for my buddy Galen.

The 3 set of 3 words
Windows Live Mail
Outlook Web Access
Bring It On


The 10 reasons

  1. So your cheap and use Firefox. Well I agree Hotmail sucks, but Windows Live Mail is damn near OWA good, does very well against gMail thank you very much.
  2. Try using gMail w/o internet access. Where’s the offline functionality? I’m sorry folks but Verizon EVDO and those T-Mobile hot spots aren’t everywhere yet. Have you tried using an AJAX app w/ a slow cellular net connection? (talk about a fate worse than water torture). Wanna gMail on a plane? Sorry, no can do. Until ClearWire takes over the world, a desktop / offline e-mail is a requirement for me.
  3. If you use POP/SMTP w/ Outlook and store your mail client side, your limited only by your computer’s hard drive space. (didn’t Google’s CEO say 2GB ought to be enough for anyone) 🙂
  4. That said, web e-mail is also a requirement for me. Which is why I use Outlook Web Access 2003. OWA still kicks the living snot out of Gmail (on IE anyway). Remember kids, the OWA team practically invented AJAX (they called it Remote Scripting back in 90s). They were the team that convinced the IE team to include an XMLHTTP object with the browser! Without them, there would be no gMail. That said, the FireFox version of OWA 2003 sucks. In partial defense of MS, the last version of OWA shipped before Firefox 1.0 was released. I’ve heard OWA 2007 will have much better FireFox support. But if you use Firefox only (I use IE & Firefox), then I admit OWA 2003 won’t do it for you.
  5. Hosted Exchange servers aren’t that expensive. I currently use Intermedia and have the ability to add/remove mail boxes, change storage quota, etc. I’ve heard 1AND1 is even cheaper.
  6. Privacy. What if the US government decided to Subpoena Google and read your e-mail? Don’t think it doesn’t happen. Granted, Live Mail would also be a target of govt. snooping, but my Exchange server probably would not be.
  7. Calendaring. Can you type “2 weeks from Friday” into a gmail appointment form and have it resolve to “Fri 9/15/2006”? You can with Outlook! Get a real date parser!
  8. Contacts. Where the heck is the mapping integration w/ address info in gMail? OWA & Outlook have had this since the Web 1.0 days. I know cause I wrote that feature for OWA for Exchange 5.5 (way back in 1998)!
  9. Looking for Tasks & Notes? Sorry Google doesn’t have that either.
  10. API support – Google may offer an API in the future, but Microsoft offers that today

Galen can keep his gMail. But, you can pry Live Mail, OWA, Exchange and Outlook away from my cold dead hands! Offline scenarios still have value to people. Feature rich Windows/Mac/Linux apps (Outlook, Entourage, Evolution, etc) can still clobber web only apps (no matter how much AJAX & Flash you try to put into them). I’ll freely admit the Redmond evil empire’s shortcomings (see the above “Hotmail sucks” & “OWA’s 2003 firefox support is weak” remarks), but Google is going have to do much better than have better Firefox support than OWA 2003 to convince me it’s better than Microsoft’s e-mail technology. E-mail mindshare, well that is another debate…

Let the e-mail Jihad begin! Who & what do you use for your e-mail and why? Would you pay for e-mail service or is free ad supported e-mail the only way to go? How important is your domain name to you? Does your e-mail server use SMTP/POP, IMAP, or HTTP? How important is offline to you? What do you look for in a web e-mail client? What about them Blackberry’s, Q’s and cell phone sized devices that do e-mail? Is Galen the one on crack or am I? (or are we both right)?

Real Estate, Technology and Transparency

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[photopress:transparent.jpg,thumb,alignright]I’ve been running two experiments, trying to find the true meaning and value of transparency in the real estate transaction. I’ve taken all of the things I have known forever, and added the things I’ve learned in recent months, and combined them into a Transparency Model using email.

For as long as I can remember, agents will tell each other things that they would never say to a consumer. Same with most ancillary service providers. We can talk to each other point blank and in short hand and with a clarity that has pinpoint precision. But when talking with the consumer everyone starts being guarded, balancing telling the truth with trying to get their business, and saying what they “know” the consumer wants to hear. Falling into what I call (and hate) “script mode”.

I’ve been having some conversations with agents, while copying “the outsider”…the owner. The other agent didn’t realize I was copying the owner at first, and was responding directly to me without hitting “reply to all”. That was a good thing, because it was quick, it was spot on info, and it was very good and valuable info.

Sometimes the consumer doesn’t know the right questions to ask, or they are just not in the same conversation with us. So we end up “communicating” with the consumer out in left field on some irrelevant tangent, while trying to focus on the real issues all at the same time. Owners tend to fall back into the past, remembering when and why they painted that wall bright purple when their daughter was 10. She is now grown, married and has children of her own. We’re trying very hard to say get rid of that purple, but they’ve lapsed back in the time machine and are standing in the room with their ten year old daughter. When they finally come back and realize you are in the room, you end up saying “yeah, love that purple!”.

By letting the owner watch two agents email back and forth quickly about their home, they “see” the real issues at hand. Very much like that photo up there, it’s as if they are looking through a two sided mirror where they can see us and we don’t see them. If they can’t comprehend it at the moment or if they just can’t take the mental picture of their ten year old out of their head, they can come back later and read it again and again. They absorb the information in small doses, and eventually “get it”.

I remember one owner way back when, who came up with a brilliant idea “in a dream” nine months later, that was exactly what I told him to do, on the first day I met him. He just wasn’t ready to hear it at the time. Too much going on that night. By using email, he can revisit and address all of the ideas in smaller doses.

Email is scary sometimes, because you are putting some hard facts “on paper” that we, in the past, would only say, but not write down. But it introduces a higher level of transparency, because the consumer can go back later and read it again and again. Different people absorb different things each time they read it. I just received an email from a seller in answer to an email I sent maybe ten days ago. She read it ten times before coming to a satisfactory conclusion. Then she emailed me…she’s about 80 years old 🙂

I am going to try, with my “Ardell & Oxford” real estate talks, to bring this “transparency” to RCG. To talk to an agent, woman to woman, pretending no one is watching us talk. NOT about the industry at large. NOT about how agents feel about the industry. I want to talk to an agent about a house and what the seller needs to do to get it sold. I want to talk about a buyer, and why they are or are not being successful in their quest. I want to talk to another agent the way we talk to each other, while everyone else is watching and learning.

Contrary to what Dustin said, it really wasn’t hard for me to find someone who will do this with me, as agents do this with me every day, always have. Now finding someone willing to do it with me live and in your face on RCG, well yes, I have found someone. But that was pure happenstance. Let’s run with it and see what happens. I should have her set up by the end of the week, if not sooner.

We are the “innovators”. Let’s kick transparency up a notch. Instead of asking others what that means, let’s create what it REALLY means…as only we can. Not because we are smarter…just because for some reason, we seem to have the cajunes to make fools of ourselves in open view 🙂 Speaking for myself, of course.

Five reasons to ditch Outlook for Google Apps

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If I had a 5-30 person office, I would jump on Google Apps in an instant, particularly if I didn’t already have an imap server and all the other hardware and software jazz Microsoft likes to sell you so Outlook will actually work.

Here’s why:

  1. You will never run out of space on your email account: Every email account comes with 2+ gigs of storage.
  2. You can easily add and remove email addresses from a web-based panel (no more calling the tech guy for basic tasks).
  3. Your employees can access their email from anywhere and on any operating system (the Mac guy can keep his Mac!).
  4. You get my new favorite Calendar system – it’s really easy to add events, invite others, and manage multiple calendars including group calendars (we use group Calendars for the very infrequent events that we must all attend at ShackPrices). Also, you can access your calendars from other people’s computers.
  5. Your employees get all the nice little touches that are quickly being added to Gmail – the ability to preview word documents, excel spreadsheets, and pdfs without opening up a new program, in-browser chatting with other gmail users, and the ability to send voice mails (to anyone!) from Google Talk.

You can already download all your email from gmail to any email program and Google will be offering an API, so you can hire a programmer (or download plug-ins) to access all the rest of your information should you ever decide to quit.

Via John Battelle’s Search Blog (a great blog if you haven’t checked it out)