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Island of Misfit Toys Dilemma: Bernanke Says Rent-To-Own Can Save the Housing Market?

February 28, 2012 | Comments: 0 | Views: 129

"Rent-to-own provisions, which would give existing tenants the option to purchase the home during their tenancies, might facilitate the transition of some renters back to the owner-occupied market. Such provisions may also reduce costs by encouraging renters to maintain their properties to a greater extent."

(Ben Bernanke, US Federal Reserve Chairman)

We're still in a housing crisis and people are still searching for solutions out of it, including the head of the Federal Reserve. Not much is working, but Bernanke's statement above made a lot of sense to me. It also led me to a flashback of the TV Christmas special, Rudolph the Red-Nosed Reindeer, and the Island of Misfit Toys.

The Island of Misfit Toys was the dumping place for all of Santa's broken and imperfect toys that his elves bungled. The toys did not fit the criteria of what the good kids wanted, so they were never delivered by Santa and were sent to the dreaded Island instead. It wasn't the misfit toys fault; all they wanted was to be loved by children.

Then there were the poor children that didn't receive any toys from Santa. They would have loved to have gotten these imperfect toys to play with and love. But no one knew how to make the exchange happen. The idea made a lot of sense (matching unloved, misfit toys up with poor kids that would love them), but the logistics plan was lacking.

It's a similar situation in the current housing crisis. People are not able to buy homes, and in turn, people are not being able to sell their homes (it takes two to tango!). So wouldn't it make sense to match up the two largest groups with the two largest needs in today's housing market? They are:

1. "Wanna-Be Sellers" (WBS): "Could someone please bring a somewhat decent offer and buy my house??? Please?!?!? It has been on the market forever and I can't reduce the cost any more! These payments are killing me and I'm looking at a short sale or foreclosure." (Or "I have broken toys that the kids with money and credit don't want!")

2. "Wanna-Be Buyers" (WBB): "I would love to buy that house but I can't get a loan due to my low credit scores and lack of a big down payment. Banks just won't lend to me!" (Or "I have no toys, but want one to love!")

So the head of the Fed brings up rent-to-own as a solution. Let the Wanna-Be Buyers (WBB) rent-to-own the Wanna-Be Sellers (WBS) homes (aka rent-to-sell). Walla! Problem solved! If the WBB pay their rent on time and in full for a year or two, they qualify for a loan in the house they are in. If they don't, they move out of the house at the end of their lease and rent another home to live in.

So why is there still such a housing issue? Because "rent-to-own" and "rent-to-sell" are still largely being unutilized. But with such a large group of WBB and WBS out there, how can this be? Why aren't real estate agents jumping on a chance to work with them?

Surprise! The two main reasons are related to money:

1. There is no loan program (that I know of) that gives low down payment and low credit score WBB a mortgage based on rental history. (No money to transport the toys)

2. Real estate agents don't think there is enough money in it for the risk and headaches they think they are potentially taking on by transacting rent-to-own and rent-to-sell deals. (No manpower to find the toyless kids and deliver the toys to them)

The first reason could be solved with a government-sponsored loan program for renters. It would be based on landlord history. Yes, I know it would be open to fraud, but the smaller brush strokes would need to be worked out by people smarter than me.

The second issue is incenting the manpower to carry the mission out. Generally-speaking, real estate agent compensation is relatively simple. They help someone buy a house and get thousands of dollars. They help someone sell a house and get thousands of dollars in commissions.

But this rent-to-own thing? Placing WBB in homes typically only generates a nominal commission. For example, in Charlotte, 10% of the first full month's rent is a common commission rate that is offered. So the math isn't that great for real estate agents; for filling a house that rents for $1,000, they earn a commission of $100. At $4.00/gallon gas, that isn't going very far. Then the agents must hope that their WBB purchase the home in a year or two so they can earn their much larger sales commissions. That is hard to keep track of, is uncertain to happen, and doesn't pay the light bills today.

Hypothetically, if the commission structure was changed (augmented by the banks and government?), it would be interesting to see what would happen. If real estate agents received $3K for placing WBB into WBS homes, that would generate interest. Then if they were also given the selling commission if the WBB wound up buying the homes, that would make it even more enticing. I'd imagine that the WBB would be shown the WBS' homes pretty quickly!

I believe this would also be a significant bargain for homeowners, banks, and the government (still holding tons of defaulting mortgages). It has the potential to stop the erosion of home values and become a true win-win-win-win-win for WBB, WBS, banks, real estate professionals, and our country's neighborhoods. It would also create jobs and get money flowing into the housing sector.

The only thing missing is the financing for the renter loan program and commissions for the real estate agents. On the Island of Misfit Homes, it worked well because Santa and the elves worked for free on a handshake deal. In real life, we need the government and banks to step up with cash incentives and guarantees.

Filling vacant homes that aren't selling (WBS) with renters who want to buy them (WBB) seems like the solution that worked on the Island of Misfit Toys. Is Bernanke ready to pay up to transport and deliver the toys?

Brett Furniss is the President & Owner of BDF Realty (Charlottes 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. You can contact him directly at Brett@BDFRealty.com. For a FREE subscription to Charlotte Property Management Weekly visit http://www.BDFRealty.com/Blog.php.

Source: EzineArticles
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Ben Bernanke

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Brett Furniss

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