Fallacies about the buying process keep many renters from exploring the possibility of buying a home, but savvy real estate agents know a little education can go a long way in turning many of these would-be renters into lifelong homeowners.
Pam Dietz, leader of the Pam Dietz Team with Keller Williams Realty in Eugene, OR, loves to work with first-time buyers. Although she lists many high-end properties and is in the top 5% of agents for her county, she finds it deeply fulfilling to help people turn their monthly rent check into equity.
“In our market,” she says, “for the same amount or less than you’re paying to rent a house, you can be buying one.”
Still, many renters consider home ownership out of reach, citing factors like a minimum 20% down payment and a crowded homebuyer’s market as barriers to entry.
Economic uncertainty and fear of a housing downturn have also contributed to more renters sitting on the sidelines, with many preferring to watch the market before making a move.
Historically, Americans have followed the Price to Income Ratio (PIR) formula, in which buyers pay no more than 2.6 times their annual income for a house. If the median household income in an area is $100,000, then the median home would sell for about $260,000.
However, over the years lower interest rates and a low supply of houses have pushed the PIR further up in many desirable areas. Take Dietz’s market in Eugene, a formerly affordable market that now has a PIR of 5.2 and double the historic average.
As a result, rents have increased in kind, making it more difficult for renters to save up for a down payment.
One of the hardest hit consumer segments are millennials, many of whom have neither a home to sell nor years of savings to leverage for the down payment.
Indeed, recent studies have shown that millennials, who form the largest cohort of first-time buyers, are significantly behind both baby boomers and Gen Xers in their rate of homeownership.
Why? More millennials are waiting longer to get married and form families, and those living near cities are often choosing maintenance-free urban centers where housing is more accommodating to their mobile lifestyles.
Yet, millennials are also well aware of the drawbacks that affect all renters, including regular rent hikes, lost opportunities of tax breaks, and the realization that the thousands they spend on rent every month is building zero equity.
According to a Rentcafe.com study published in USA Today, younger adults are spending a stunning amount of money on rent — $93,000 by age 30. More importantly, rent sucks up about 45% of their income during this first, critical decade in the workforce, leaving precious little left over to save for a down payment and work toward home ownership.
Vija Williams, director of growth for Ben Kinney Brokerages with Keller Williams in Seattle, WA, says that many millennials have convinced themselves that owning a home is out of their reach.
As a real estate agent, you can help turn renters into home buyers by dispelling these 5 common myths.
Sure, while it may make more sense to rent than to buy over a short term of a few months, the equation can easily flip with buying being the best value for a homeowner planning to stay for at least five years and, in some cases, as few as two years, according to personal finance site NerdWallet.com
The New York Times, Realtor.com and Zillow all offer online calculators in which renters can calculate how long they need to live in a home before the purchase costs outweighs the merits of renting.
According to Hunter Perry, senior manager of Strategic Growth at Compass, renters shouldn’t just look at their monthly costs. “It’s important to take into account long-term financial benefits, such as building equity, large tax deductions, consistency of monthly payments and potentially huge appreciation,” he says.
Income is important but not as limiting as people may think. Just as there are high income earners who are “house poor” (spending more than 30% of their income on their mortgage), there are people with modest incomes who are able to live comfortably in their own home.
Also, renters must bear in mind that rent is almost always guaranteed to go up, while the payments on a fixed-rate mortgage will not, making ownership the more budget-friendly approach over the long term.
Of course, many first-time buyers will need to pay down their debt and get their monthly spending organized before they can begin house-hunting. Agents specializing in this segment of the housing market should be willing to work with these clients months before they’re ready to buy, helping them assess all factors that will help make a home’s monthly payments affordable.
Most consumers are aware that following the housing crash of 2008, banks tightened their lending requirements. The perception is now you need 20% down to purchase a house. That means, bringing $50,000 to a closing on a $250,000 house — a seemingly insurmountable task for most renters.
However, what many are not aware of are the many programs that allow first-time buyers to close on a house with almost nothing down.
Dietz cites several local programs in her area that allows people to bring just $1,000 to a closing. Buyers may have access to similar help through the VA, FHA and even USDA for rural Americans. “Not having tens of thousands for a downpayment and closing costs is no longer a problem,” she says.
Once a renter has been pre-approved for a mortgage, they have a good idea of their target price range. Then, when they start looking at the entry-level inventory, they find themselves up against a competitive market.
Here’s where agents can really demonstrate their value. An experienced agent will not only guide first-time buyers into areas where homes are more likely to be in their price range, but they can also help them find those rarer listings where a home that’s not necessarily move-in ready yet in a nicer neighborhood is selling for less.
I tell all first-time homebuyers to buy equity while you can, especially younger first-time buyers,” says Justin Bailey of Bailey & Co. Real Estate, Knoxville,TN. “Buy something you can get a great return on in three-to-five years.”
Renters who have watched many real estate TV episodes may have unrealistic expectations about buying a property.
First, they may not be aware that every property has pros and cons. It’s important to remind them that finding an affordable home is going to involve some trade-offs, but ultimately, will offer the security and accomplishment of ownership.
Second, good houses go fast, so first-time buyers must be financially, mentally and emotionally ready to act.
To act quickly, Dietz uses dotloop’s mobile app to create an offer on-site; get her clients to eSign using their smartphones; and submit it to the listing agent, sometimes before even leaving the property.
Agents who are successful in marketing to renters know this is a long-term game, in which the client will need lots of education and hand-holding even before the pre-approval phase.
Dietz uses a postal mailer to generate leads. Other agents have successfully taught seminars for renters and produced YouTube and Facebook instructional videos.
Agents catering to renters can also build rapport by expanding their professional services into rental management, often using the same tools they use for real estate transactions. Dotloop, for one, offers a collaborative platform for renters and landlords to create, eSign, close and store documents.
Intellirent, a marketing, screening and application management platform for agents and property managers, uses dotloop to handle lease signing and storage. Dotloop also drives the back-end of Zillow’s rental management platform.
According to Cassandra Joachim, director of business development at Intellirent, San Francisco, CA, quite a few agents use their dotloop-enabled platform for rental contract management. The platform also allows them to streamline their rental marketing efforts, connecting agents with renters.
“You want to stay in the rental market loop,” says Joachim, “because one day those renters will be looking to buy.”
As more renters sit on the sidelines to wait out today’s uncertain housing market, there will be a growing demand for agents to help them navigate the home buying process. Those who take the time to cultivate and build relationships and connect these customers with the right tools like dotloop will find this niche reward with years of future leads.