Guaranteed Lease Payments for 6 Years! Wait what?
The Good Ole Days:
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When the housing market was humming, most builders had some sort of guaranteed buyout program available for buyers that had a home to sell. In most cases, the builder wasn’t actually purchasing the prospective buyer’s home. Most of the time, builders had established relationships with 2 or 3 real estate agents / investors that would offer the program.
In essence this is how the program works (worked):
- Home buyer has a home to sell.
- Home buyer enters into agreement to purchase a new home from builder X, contingent on acceptance of guaranteed buyout terms.
- Home buyer gets a market value analysis from a real estate agent / investor and a guaranteed buyout price if home doesn't sell during the time the new home is being built. In most cases, the guaranteed buyout price is just below appraised value.
- If terms are acceptable, home buyer gets a brand new home and lives happily ever after.
- The real estate agent / investor receives the typical 3 or 3.5% commission and typically an additional fee (roughly 2% or more) from builder X.
- Investor purchases home at hopefully below market value, receives 5%+ in fees from builder X, and has the option to either sell the house or rent it out.
This concept worked great when there wasn’t a glut of below market value homes on the market and homes were moving.
A New Approach:
Browsing a popular builder website this week, I ran across an article about what seems to be a new concept and potential opportunity for property managers. With the housing crisis and subsequent reduction in home values, qualified new home buyers are having trouble selling their underwater homes in order to purchase new houses. And now, guaranteed buyout programs mentioned above are quite a bit more risky and few and far between. This said, new solutions are being sought to help potential buyers with homes to sell.
Marketplace Homes out of Michigan is solving the problem by working with home builders to offer 6 years on guaranteed rent for the new home buyer’s current home. Per their website, they guarantee 100% of lease payments at market rent, all gas and electricity bills, all tenant repairs and all maintenance.
How do you guarantee the rent? Per the article, Marketplace gets paid a prearranged service fee from the builder that exceeds the amount an agent would be paid â roughly $8,000 â $9,000 additional.
Win – Win – Win
As you can imagine, this is a big win for builders and buyers. Buyers, if they can stomach leasing their house for the first time, get to move on to a more suitable home for their family. And think about the peace of mind that 6 years of rent payments gives. When the leasing contract is up, the buyer will actually have several options; sell the house if the market rebounds, re-lease the house with the current management firm, or re-lease the house with a new firm. With a strong long-term lease history, the buyer should not have a problem getting a loan for future homes.
Builders obviously win by selling more houses and have a strong way to overcome a common objection in this market. The downside is obviously the hit on margin by paying the extra fees. But, as they do more and more of these, managing the process and profitability shouldn’t be an issue.
And, lastly, the project management firm, in this case, Marketplace Homes, wins. They earn a nice fee for assisting in the sale of the new house, they earn additional fees to assist in managing the rental, and potentially more money as rental prices fluctuate. I would imagine that exclusive listing agreements can be worked out for selling the property during the lease term as well.
Photo: Grand Canyon NPS