Creative Buying & Selling

by Paul C. Clark, Rhino Times Greensboro NC

Published November 12, 2009

Potential homebuyers who have had a recent string of bad luck don’t necessarily have to give up on their plans to purchase a new home.

“We provide housing to people who maybe have had divorces or medical problems or just don’t have enough money or have credit problems,” said Jim Williams, who heads Triad Residential Solutions, which has been providing the service in the region for six years. “We provide an opportunity to own a home again – or maybe for the first time. We coach them through the process of needing to pay on time and doing the necessary things to build credit for 12 or 24 months. We hold their hand through the process.”

Rent to own is an attractive offer for many renters who haven’t had mortgage payments or financed automobile purchases or may have had less than timely payments on things like utility or medical bills. Moving into a rent-to-own home, with a structured payment plan managed by a company experienced in building up credit scores, can be a make-or-break difference for such potential buyers.

The payoff for such buyers is the purchase option. Families who rent from a rent-to-own company have the option to buy the property, an option that is provided by the payment of an option fee at the beginning of the lease. The purchase option gives the renters the option to walk away from the house if they don’t like it after a year or two. If they do like the house, they can exercise the option to buy it, working with the rent-to-own company that has the record of their timely payments and a mortgage company that is familiar with rent-to-own buyers.

Triad Residential Solutions and other rent-to-own companies have mortgage companies they work with regularly who have come to trust rent-to-own buyers with a year or two of good payment records.

“You have to qualify for the mortgage first,” Williams said. “You have to get all your ducks in a row first. Here, we build you up and get you into that position.”

The other big payoff for potential buyers is a way around the vexing down payment issue. Prospective buyers frequently go into rent-to-own contracts with no money for a down payment, and thus without the foot that would usually get them into the door at a traditional mortgage company

Here’s how the process works. Say a potential buyer wants to buy a house that’s valued at $200,000, the rent for which would usually be $1,000 a month. Under that scenario, a rent-to-own customer could pay $1,100 a month in rent and then receive a $300 rent credit toward the down payment monthly. After a three-year rental fee, on a house with a $5,000 option fee, the renter would have built up a total of $15,800 toward the cost of the purchase.

The rent premium serves a second function – bringing the rental cost up to the typical cost of a mortgage, once fees and insurance are added in. That adds to the buyer’s cost a little, but gives them a solid record of making mortgage-level payments regularly, which makes them attractive to the mortgage company once they decide to buy.

“It’s training them to be good credit risk,” Williams said. “They don’t get the tax benefits, but it mirrors a mortgage. We also price these things similar to what a mortgage would be in the marketplace with taxes, insurance and any homeowner fees or dues so when they do convert to a mortgage, they’re a better risk.”

But taking a rent credit may not be the best way to go, according to Ed Regensburg, the president and owner of Property Administrators, a builder that also does rent-to-own. Regensburg sets aside a percentage of homes in every development he builds to sell through rent to own, and said he doesn’t like to offer rent credits because they tie up the renter’s money, which then can’t be used if the person has a car break down or a medical expense.

“I would rather rent that person the house for what they can afford and not give them rent credit and work with them to fix their credit,” he said. “I’d rather them do a direct draft into a money market account and earn interest.”

Regensburg said that most banks he has dealt with will allow rent credits to go only toward closing costs, not toward the down payment on purchasing the house – a distinction some renters don’t understand.

Having had a foreclosure or a lost job doesn’t necessarily prevent someone from being accepted for rent to own, according to Regensburg. He said that, with a person’s rent and bill payment history, he can see if sudden payment problems were caused by the lost job.

“We try to understand the circumstances behind it,” he said. “We can still determine that they had a good payment history before that.”

The other big winner in rent to own is the seller, particularly what the market calls distressed sellers – sellers who have to move in a hurry, say to take a new job, and need the money from the sale quickly. Because a rent-to-own company buys the home before lining up a resident buyer, it can usually buy the home whenever the seller needs to sell.

“We provide a quick solution for those situations,” Williams said. “That allows those people to move forward in their lives.”

The rent-to-own segment, like other segments of the market, has been affected by the downturn. Regensburg said that, with credit tighter, the percentage of rent-to-own customers who end up qualifying for a mortgage has dropped, and it takes longer for his company to get them qualified. But he said he has worked with customers to adapt to the current market, sometimes extending the rental contract to three or four years even if it has run out, to get the customer’s credit up.

“When the market was good, we were turning people over in six months to get a mortgage,” he said. “Now it takes a little more work to get them to that point.”

For sellers, rent to own has been a godsend in the current market, when it can take longer to sell a home. For buyers, rent to own can be a great option that would be unavailable through traditional financing.

As with any transaction, the contract and the company you’re dealing with are important. Regensburg said that people shouldn’t go into any contract without checking out the company they’re dealing with.

“Rent to own is a great program for people if it’s done correctly and done scrupulously,” he said. “But I would ask people to beware some companies that aren’t doing it correctly. Check with the Better Business Bureau.”

Read further for more insight into our background and philosophy:

We’ve been buying income-producing properties for nearly 12 years.

We’ve also never experienced a year where we didn’t continue to grow. It’s this experience that qualifies us as real estate investors, of which we're very proud! I spent 30 years retail furniture industry as a retail store owner before going to work for the Mega furniture stores in High Point, NC, the  “Furniture Capital of The World” and conducted my real estate investing on the side until 2005 when my wife, Karen had to QUIT her job in the furniture business so we could handle our real estate portfolio as it had grown to be quite substantial. I didn’t quit until 2007 (security??) and should have quit long before! This is about the same time everyone started asking us  “How did you do it?” Can you show me how?” “Do you have any advice?” “ Can you coach me?” “Will you partner with me?” “ I am afraid will you help me understand financing real estate?”, “Why do you use Trusts?”,    “Can I follow you around for a day?”, etc..

I give you this bit of my past so you’ll understand why I’m still interested in watching ads and critiquing their effectiveness. There have been a few nights I’ve awakened and couldn’t get back to sleep right away, so I turned on the television to see what infomercials were running. A few years ago, before the sales market crashed, there were dozens of real estate gurus running around calling themselves investors.  Late-night television was filled with infomercials in which one guru after another was touting his or her program on how to get rich quick and quit your job by "investing" in real estate.  Many of these programs were so well scripted and acted out that it was difficult to sit through the entire program without a strong urge to pull out your credit card and pick up the phone.  I even worked for one a few years back so I saw the inside story! Let me tell you, It was all about SALES of their products not about investing in real estate!   Wonder what happened to that concept?  However,  we’re now in the best market we’ve seen in our lifetime to invest in real estate, but the "investment" gurus have conspicuously disappeared.   Where have they all gone???

Throughout the years, I’ve watched one guru after another rise as bright as the sun only to burn up like a shooting star as they fell from grace, often the result of legal action or bankruptcy.  When the real estate market is red hot, as it was a few years ago, anyone could make money.  Even a dead fish can swim downstream. When prices are rising by double digits and buyers are bidding up prices beyond the asking price trying to get in on the gravy train, almost anyone can make money.  But, buying properties, fixing them up, and flipping them for a profit is not investing!  It’s speculating! We use flips to fund our long term buying, but not as a normal business model. That’s a job, not investing!!!

It’s when the market cools that we learn the glaring difference between investing and speculating. The same is true with all types of investments; sound strategies stand the test of time.  Granted, some years I have experienced slow growth, but those years usually occurred near the peak of a real estate cycle when there were few deals to be found.  It’s hard to find a bargain when the market is swarming with novice buyers, lining up to pay too much, hoping to be able to quit their jobs and retire to the islands with fancy cars, boats, and planes like they see in the infomercials. When will they ever learn?

Investing and speculating are very different; investing is putting time or money into an asset for the purpose of generating an income.  Speculating is buying in anticipation of selling at a higher price and making big profits.  Betting that rapidly rising prices will assure you a profit is risky speculating, not investing.  Bottom line, if you have to sell a property to make a profit, you are not an investor; you’re a speculator.

The hotter a market gets, the greater the lure becomes to jump on the bandwagon. As many are now learning, buying at or near the top of a real estate cycle can be financially devastating.  When mortgage funds dry up, prices start to fall, and buyers disappear, many speculators suffer huge losses trying to hang on until the market rebounds.

The past couple of years have caused many people to have a bad feeling about real estate. They will tell you that real estate is in the tank, that it’s no longer a good investment, but when you ask them what’s the best way to build wealth, most of them will still tell you that it’s through real estate investments.  For me, the fun part is asking them to define wealth. Try it! You’ll get a hundred different answers.

The problem is that most people confuse income and wealth. They aren’t the same. Wealth is not the big house in which you live.  It’s not the expensive car you drive. It’s not the fancy clothes you wear.  It’s not your country club membership or your boat or plane. These things may all be indicators that you have a good income, but they don’t mean you are wealthy. Wealth is measured by how long you can maintain your standard of living if you are suddenly no longer able to work and earn.

Wealth is an income stream, a source of passive income that doesn’t require you to trade your time for money. Passive income is interest, dividends, royalties, or other instruments in which you have invested prior earnings or expertise. Income from rental real estate investments also qualifies as passive income and is possibly the best way for average working people to build wealth.

Real estate is known as the world’s greatest wealth builder because it’s the only investment I know of that ordinary working people can purchase using a small amount of their earned income, yet it can produce enough revenue to pay for itself and provide a return on the cash used to leverage the purchases. In the stock market, you can borrow only 50 percent to buy stocks and bonds, but real estate can frequently be financed 100 percent or more and still cash flow. That means that under the right circumstances, you can buy properties with little or no money down, finance the full purchase, and not have to dip into your wages to pay for it.

The biggest problem with the ability to highly leverage real estate is that it attracts speculators who have no intention of holding the properties for the ongoing income they can generate. These speculators acquire real estate to sell to others, which works fine as long as there are buyers willing to pay enough to give them a profit. But, when the market goes cold and buyers aren’t there, it can be disastrous. That’s what we’re seeing happen right now!

Have you ever played the board game Monopoly? If so, you know that the way to win is to buy as many properties as possible, put houses and hotels on them as soon as possible, and then sit back and collect the rents. Gradually, the players who were afraid to take risks and chose not to invest early in the game are forced out because it takes all their money to pay rent to those who did. The interesting thing about playing Monopoly is that the winner is nearly always strapped for cash early in the game. He keeps nearly all of his money invested and often borrows more against properties he already owns in order to continue buying.

Monopoly is about as close to reality as it gets. The winner keeps very little cash early in the game and invests for the future. The winners in life do the same thing. Those who spend everything they make when they’re young on fancy cars, motorcycles, boats, big screen HD televisions, designer clothes, and other things that go down in value rarely have as much over their lifetime as those who invest. While they may initially appear to be more successful, people with this "look-at-me" lifestyle usually find themselves in an increasing struggle to keep up with the lifestyle of those who sacrificed in the beginning and invested for the future.

The losers at Monopoly will sit at the board with a pile of cash and pass up buying opportunities because they don’t want to risk running low on money. As a result, other players buy the properties and eventually force them out of the game. Without investments, their only income is to pass GO and collect $200 (that’s their salary). In real life, properly-leveraged real estate produces an income stream that barely breaks even in the beginning. It is not exciting or stimulating until you look at the impact of owning it over the long term. While initially it may take all the income it can generate to pay expenses and mortgage payments, over time, the rents goes up and the mortgages pay down. This produces an ever-growing cash flow that starts as a trickle and eventually becomes a substantial and growing income stream the longer you own the properties.

The present market crash has forced speculators out of the real estate market, and falling prices are now making it increasingly more attractive for long-term investors. Granted, if you’ve never invested in real estate, it can be scary. When I bought my first investment property, I sat at the closing table with sweaty palms and butterflies in my stomach. Like many first-time investors, I saw the mortgage payment coming from my paycheck. Although I hoped the property would produce enough to make the payments, I wasn’t totally sure.

As I have already mentioned, we are in the best time I’ve seen in my lifetime to invest in real estate. Think of building wealth with real estate as a game, like playing Monopoly for keeps. The more you learn and the longer you play, the better you get and the more comfortable you will become. at the peak of the real estate market.  At the time it was very difficult to follow our advice and make purchases that would cash flow. There were simply too many greedy people speculating in real estate and pushing prices to levels that made no economic sense. Those who heeded our advice and didn’t get caught up in the euphoria are the ones who are now buying and getting tremendous deals.

What’s amazing is the fact that today there are more deals that meet our investment criteria than we could ever possibly buy. Deals, which were so hard to find a couple of years ago, are begging for buyers today. If you want to build wealth and take advantage of today’s market conditions, www.TriadMastermind.com for real estate investors is absolutely the best and safest way for new investors to get started. It contains step-by-step guidance on how to make sensible investments, but more importantly, in addition to teaching you what to do, it also teaches you what not to do. We will “Hold your Hand” and walk you through the dynamics and creative finance techniques of real estate investing so you can “Create your Own Economy” where you can control your financial environment and not have Wall Street or the US Government do it for you at a MUCH HIGHER expense, your freedom!

To your success by creating wealth in Real Estate!!!!!!!!

Jim Williams & Karen Rittenhouse

www.triadmastermind.com

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