Many movie makers plan alternate endings even though they know how they want the movie to end. This just gives them some options once their movie hits the edit room. I think real estate investors should do the same thing before they commit to buying a property.
A few weeks back I shared the story of our hard to rent lease option property. Furnished with the previous owners white doilies and relaxed retirement décor it didn’t have mass appeal.
After three showings we didn’t have a single application.
Once the sellers moved out, we brought in a painter to give it a fresh look and hired a cleaner to get it shining from top to bottom, but we found that we’d lost momentum. The dozens of people that had rushed to us before were down to odd couples here and there, but at least once it was vacant we began to get some applications.
We spent the month of June showing it. We accepted two different applicants but they both fell through before a final deal was done.
Now, with a rather limited amount of interest in the home and the first mortgage payment looming, we decided to implement plan B. Friday afternoon I whipped up a Craigslist ad to put the property up for rent (as a regular rental).
Within 5 minutes of me posting the ad to Craigslist the phone calls began. We set the viewings up for Sunday at 5pm, had a nice rush of people take a look and took 4 applications! We have tenants moving in today. We knew it would be a popular rental but we had no idea just how in demand it would be!
Plan B worked beautifully – probably even better than we had hoped.
But the key to this story is that we actually had a Plan B. We had hoped the first ending to our movie would work out as well as we planned and imagined, but just in case it didn’t, we had a Plan B and even a Plan C for this property. We had more than one exit strategy.
We are giving up a bit of the monthly cash flow because we’re renting it for about $200 less a month than we would have in our rent to own program BUT we aren’t giving any rental credits so our overall return (and that of our joint venture partner) doesn’t really change that much. And the big benefit to us is that we’re getting someone in there right away – before we have to put money in to cover any expenses out of our own pockets AND the rent the property generates is high enough to cover our expenses with a small cushion of positive cash flow.
Even if this option hadn’t worked out for us – we had enough equity in the property because we purchased it for $25,000 under market value – that we could have turned around and sold it and still netted a few thousand dollars (or more if we chose not to use an agent). That was Plan C.
We are disappointed not to have the cash flow but we were never in a pinch. Before we even did this deal we had a Plan B and a Plan C in the event that we were unable to make Plan A work. And we were comfortable with what both the Plan B and Plan C would do for us.
And, it may work out even better than we expected as a Plan B because the current tenants may actually buy the home from us. They are brand new to the area and aren’t sure if things will work out – which is why they didn’t want to do the rent to own. But they have already expressed an interest in buying the property in the future if things go well for them – or maybe even converting the lease to a rent to own agreement.
So my lesson for all investors buying properties is to ensure that you have more than one exit strategy for the property. If you’re planning to flip a property after renovating, run the numbers to see if it would work as a rental if you aren’t able to sell it for a good price. If you’re buying a property to put tenants in, make sure you have other options for the property (like resale or lease option or moving in yourself for awhile) if your original plan isn’t working out like you’d hoped.
If the only way this deal had worked for us was as a rent to own then we would have to carry it for a few months while we waited to fill it with the right people. It was a very undesirable scenario for our partner and would have been a lot more stressful for us.
Instead, we’ve bought ourselves a year, and given ourselves more options in the future for this property.
When you’re working with real estate, give yourself options. There will almost always be an ideal scenario, but if you can have a Plan B and even a Plan C then you’ll always have a way to get out of the deal that works for you. And you’ll be better able to stay calm when things don’t go as planned.