A lady we contacted a few weeks ago was crying by the time we were done with the phone call. The good news is, they were tears of joy and not of sadness. Although her reaction was maybe more emotional than what we are used to, it wasn’t necessarily surprising.
Before I get into the reason for her tears, I want to switch gears to talk about a new type of deal source that we’ve been testing with our fund Guardian. As a quick reminder, Guardian buys, sells, and carries the mortgages for starter homes in the US Midwest and Southeast. We have figured out a process for identifying tenant-occupied homes for sale. It might not seem like having a tenant already living in the home is a big deal, but it is.
You see, one of our most important criteria in selling these starter homes is being able to keep the mortgage for the homeowner at 60% to 80% of the local market rental rate. In order to fit this criterion, the sum of the mortgage, property taxes, owners insurance, repairs, and maintenance needs to be very close to the going neighborhood rent rate. If all that comes together, then it becomes a no-brainer for tenants who are truly interested in becoming homeowners.
When we made the call to the lady living in one of the potential Guardian homes, she said that she had been a tenant in the home for over 6 years. Our message to her was simple: “Would you like to own the home you’ve been living in for about the same cost of renting it?”
She was emotional because she never thought that owning a home could be a possibility for her and her family. This is actually one of our biggest obstacles since many of our best candidates don’t know that this type of opportunity is available to them. Our challenge is to get the word out since they are usually not even on the market looking for a home to purchase.
We’ll make a call like this one, offering to sell the home to the tenant, and if the answer is “yes” and they get through our underwriting, then we’ll buy the home. Otherwise, we pass on the home and save our capital for the next deal. I like that control.
There are many things I love about this type of purchase. In addition to both the positive emotional impact of helping renters become successful homeowners and the control that we have over the investment, it is really low risk, it produces instant cash flow for the fund and the investor, and the deals can happen pretty fast. If I were to pinpoint a difficulty or bottleneck in the process, it would be finding the right deals. We’ve discovered that buying from multiple sources and in various ways helps lure the best deals out of hiding.
Does the tactic of targeting tenant-occupied homes always work out? No. Many tenants are not interested in becoming homeowners – whether they’re not cut out for it, don’t want the responsibility, are scared, or the timing isn’t right — and many can’t pass our underwriting. The successful candidates must be able to prove that they have the ability to pay and that they really want to be homeowners.
Either way, it’s better to know all of this up front. When talking to candidates, we try to get a sense of how they think, especially when we bring up property taxes, insurance, and repairs. If they balk at all, we usually won’t qualify them. They would just end up being unhappy, and so would we, if they were to choose the homeowner route. All homeowners understand that it takes a certain mentality to be one. It’s not for everybody. And while it’s extremely rewarding to help qualified renters become homeowners, and it’s even more satisfying to provide healthy returns for our investors, it’s important to know which deals are worth it and which warrant a pass. So far, the crying lady seems like a perfectly grateful new homeowner.