It’s been a rough ride for homeowners and many investors since 2006 when it seemed that the good times would never end. But they did. The millions of foreclosures have done a lot to put a damper on the American Dream. The younger generations are no longer set on buying that first home. Many of them are living with their parents because they can’t even afford rent.
Investors have stepped up over the past six or more years, accounting annually for more than 30 percent of all home purchases. Some of that buying has been in blocks of hundreds or thousands of homes by major investors like the Blackstone Group. One recent headline tells us that the percentage of purchases by investors rose to 42 percent in one month. As long as the foreclosures keep coming there will be investor participation, but the competition for good houses has heated up. That competition is bringing higher prices, thus the media articles about a “market recovery.”
It’s weak, even if we can call it a recovery at all. There is still a large hole which the first time buyers used to fill. Just tracking prices isn’t working like it has in past markets. This is a new situation, and old statistical models may be misleading. The multiple strategies used by investors have all worked really well over the past few years:
• Wholesaling: Investors use location and negotiation skills to locate properties at deep discounts and then quickly sell them to other investors who wouldn’t have found them on their own. The sale can also be to a retail buyer, but there’s far less of that activity in current markets.
• Fix & Flip: The investor buys a distressed property and does renovation and repairs, many times selling them within three months or so to a rental property investor or possibly a retail customer.
• Rental Investors: These people buy homes with the long-term goal of renting them out for positive monthly cash flow over expenses, and a profit from appreciation at sale in the future.
All of these strategies are still working, but they’re mostly just contributing to the movement of Americans from homeownership to tenant status. This may be the future, at least for the next five to ten years until the economy has a chance to improve and unemployment decreases. It’s been a nice ride for real estate investors, and it’s not over. However, if we consider the dream of homeownership wounded but not dead, things will turn around at some point and buyers will be back. However, they may want to buy but still be hampered by their credit, lack of down payment cash, employment uncertainty, or student debt.
Even long-term rental property investors must have an exit strategy, and it’s in that exit strategy that investors may be able to help renters move back to ownership. The goals of both parties are aligned, as the buyers will be taking the home off the books of the investor when they want to liquidate the investment. Perhaps there’s a way to increase the number of potential buyers for that investment property by making it easier for them to buy.
Rent-to-own or lease-purchase arrangements have been around for a long time. A buyer who may not be ready to purchase but would like to do so can lease the home with an option to buy at some point in the future. They may need to build a down payment, or improve their credit. There are a number of benefits for the investor in this type of arrangement:
1. The tenant buyer really wants to own the home, so they’ll take better care of it.
2. The lease agreement may be structured with the tenant buyer paying some of the repairs and maintenance, definitely not part of a regular lease.
3. In many cases the tenant buyer will pay a higher rent, increasing cash flow.
A rental home investor with a plan to sell a home five to eight years in the future, perhaps to buy a more expensive rental or invest elsewhere, normally would just follow their plan and list it for sale. They’re already marketing the home for tenants, but now could take a different approach. How about helping a strapped tenant who wants to own but has a few hurdles to jump? Instead of just marketing for a tenant, changing the marketing approach to locating tenants who want to own could work for both sides.
The investor gets a three to five-year lease-purchase agreement providing the tenant with the option to buy on or before the lease expires. The timing of the expiration is when the investor wants to sell. The price is set to provide the desired profit for the investor. The tenant buyer has a plan with a due date, and they can begin to move toward ownership, taking great care of the home. It’s really no big change for the investor, just a different marketing approach. Should the tenant not exercise their option to buy, the investor is just fine, as they can list the home for sale as they would have anyway. It’s a win-win and may help bring back the dream.
Written by Dean Graziosi– New York Times Best Selling Author
Red Rock Management & Real Estate Investment
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