In an economic real estate downturn of any size or proportion, how does a single family residence fund model compare to a debt fund model?  The results just might surprise you.

 

Rentrent-to-own-yardsign to Own Fund 

(Single Family Homes)

Debt Broken Piggy BankFund

(Hard Money Lender)

If our tenant stops performing, then we evict.  A 30 day or less process.

 

If their borrower stops performing on the debt, it can take months or years to foreclose, plus thousands of dollars to eventually regain control of an already distressed property.
Once we evict the tenant from the home, we will be able to rent the home again (or sell it, if that turns out to be the better option), since it is in the core rental market. Once they’ve regained control after the foreclosure, the lender will now be the owner of an incomplete distressed property that will require management and additional capital.  In a downturn, it may not be prudent to invest money in bringing the property to full capacity since the market may not be able to absorb it.
We purchase at 70% to 95% of the value of the home.  We get a better price since we pay in cash and purchase homes through short sales, which earn the bank Community Reinvestment Act Credits.

On average, we are at a true 84% LTV ratio at the time of purchase.

 

They are usually in the 60% to 65% range LTV on an incomplete, distressed property that will further require time and money to stabilize, restoring it as a complete, cash-flow property.  Their outcome is based on the speculation of achieving a stabilized product.

A word of caution: if they loan on a 60% LTV for a finished product, it is realistically closer to an 80% LTV at the current value without the improvements being completed.

If the home is not worth what they have to pay for it, as agreed upon in the Rent to Own contract, the tenant may no longer care about the money they’ve invested — be it down payment, fees, repairs, improvements, or accumulated rent credits. The possible incentive is that this is their home and they might fight harder to keep their family in it. The borrower will only care about the equity put into the property.  If the market turns and that equity vanishes, the borrower doesn’t have any financial incentive to complete the project.  They tend to walk away and allow the lender to foreclose.
In a downturn, our Rent to Own tenant will most likely either walk-away or request to have the lease converted into ordinary rental terms, giving up the right to purchase in the future. However, the demand for core rental market properties tends to increase, with rents remaining strong in real estate downturns, because renters in the upper market are forced to find more affordable housing. In a downturn, it becomes a challenge to find buyers, renters, or lenders for the types of  properties associated with debt funds.

 

We don’t have to predict the future.  We simply continue to operate our properties, because they will still be producing income in one way or another. We have the option of waiting out the storm until the market recovers.

 

Any protective Equity in the properties quickly evaporates, because it’s difficult to determine when a downturn will start, or how long it will last.  It’s almost impossible to decide exactly the right time to sell, or how much to discount the properties, unless you can predict the future.

Which of the above terms appears to be the better risk during an

economic real estate downturn?