“20 Minutes of Successful Niche Secrets – EPISODE 45,”
With the Rent to Own Expert Roy Cleeves – find out how he creates Raving Fans on both sides of the transaction!
Glenn: Hi! It’s Glenn McQueenie, and thanks for joining me on my 25-Minute Success Series podcast. Today we have a pretty cool guy who I’ve known for a long time, and we’re joined today by Roy Cleeves. How are you doing, Roy?
Roy: I’m doing wonderful, thanks!
Glenn: Good! Thanks for joining me. And just for those listening here, Roy Cleeves runs the CC Realty Group with Keller Williams Golden Triangle Realty in Kitchener, and he’s got another expansion team in Burlington. What I’m excited to talk to Roy about today is his whole rent to own niche, because I think it’s such a great niche market. So Roy, can you just tell us a little bit about yourself? Just tell me where you are in your business now (what it looks like now), and then we’ll see where you want to go with everything.
Roy: Yes, for sure, Glenn. It would be my pleasure. I’m in my 15th year as a real estate person and I’m a broker. I do have a team of seven at Keller Williams Golden Triangle Realty plus myself licensed, and two admin. And then I have an expansion team I’ve just started in Burlington where I have an expansion partner there, and we’re looking to hire more people there. Throughout 2017 we were able to do 175 transactions, which was wonderful. It was actually the best year ever for me, so that’s wonderful for me and my team. We plan to get to 200 transactions in the Kitchener/Waterloo market in 2018 and to do at least 50 transactions in the Burlington market. A specific portion of those will be rent to own, which is what I specialize in, and I thank you for bringing attention to that.
Glenn: Yeah! So before we get into what a rent to own is, those listening don’t really understand what the concept of an expansion team is. Can you just tell us quickly what an expansion team is?
Roy: Yes, for sure. Keller Williams has a wonderful way of opening our eyes to doing more business, and one of those ways is an expansion team, whereby we take the success we’ve been able to do in one marketplace, and we take it to where we have another office. We partner up with what we call an “expansion partner” there, and then we put in the systems and the models to build another team in that location, and create the same sort of success. So that’s what an expansion team is, and it’s a pleasure to be able to have started one in 2017 there.
Glenn: That’s great, because there are people who rent to own in Kitchener and there are going to be people who rent to own in Burlington, and probably in Hamilton, in London, and in every possible city across North America and even the world, right? I think this is really the beginning of your own rent to own expansion franchise that you’ve got.
Roy: That’s a very good way to put it. Rent to own is becoming more and more popular, and I think it will only get more popular with the stress test that the government has required that people do for their mortgage coming up in January 2018. If it’s good for you, Glenn, I’ll explain what a rent to own is and why it’s popular now.
Glenn: Yeah, for sure!
Roy: A rent to own is basically, we have investors that like the idea of buying a property for a tenant that would like to own that property, but at this particular moment, cannot get a mortgage. They have the income to support it – they just don’t usually have the capability to get the mortgage, usually because of a blemish on their credit from something that’s happened in the past. So we put together this investor and a tenant, and the investor will buy the house. The tenant will pay the going monthly rent for the mortgage, plus they’ll pay a little bit extra each month to go towards down payment and to create a good, positive cash flow for the investor. Then we put a plan where they will buy this property from the investor three years down the road, and the investor gets the increase in value of the property. We place that generally at 5% per year, because we feel that’s something that’s very achievable. If it goes higher, then that’s a benefit to the tenant, because they’ve actually got a property that’s worth more than what they’re going to pay for it in three years. And if it goes a little bit lower, at least the investor has a locked-in number that they know they’re going to work towards.
Glenn: Right. So it’s a locked-in, guaranteed price up front that doesn’t change, irrespective of how the market goes.
Roy: That’s correct. And the fact that they pay a little bit extra each month helps them save towards it. A lot of times, another issue that comes up is that they don’t have the down payment. They might even have good credit, but they’re not able to save a down payment. This makes it a forced savings for them.
Glenn: Right. So how did you get into this niche?
Roy: I happened to run into a client of mine, and his name is Thomas Wong. Thomas Wong had studied this with Robert Allen, who’s known for writing books on real estate.
Roy: It became his speciality, so Thomas Wong was kind enough to invite me to understand this process and to invest with him in some rent to owns that he was already doing and taking part in. That was back in 2008, and I could see how successful this was. It actually helped good people that maybe tried a business, and the business failed, so they have this blemish on their credit from a business failure. They are now re-established, but they need that time to be able to buy the home, because their credit needs time to repair. I could see how this would help people and how it would be good – not only for investors, but also for those tenants – those people that needed a home.
Glenn: That’s amazing. So how do you currently lead generate for these people? How do you get your message out?
Roy: We do it in a number of ways. We do get a great response through the Internet. We have a renttoownkitchener.com site that brings us a lot of leads, and also advertise in the Homes Plus Magazine, which is an older way of advertising because it’s print. However, it seems most effective for the rent to own. It seems to be those people that are tenants tend to pick it up and have a look at the homes that they’d like to buy in the future, and then they come across my ad with the option to do a rent to own now. Then, of course, we have referrals from mortgage people, because mortgage agents know that they cannot get this person a mortgage right now. So I’ve reached out to a number of mortgage agents. We also put signs up with our listings (particularly ones that are in a first-time homebuyer price range), because they actually work best for a rent to own. We’ll put a sign there that says, “This home is also available for a rent to own.”
Glenn: Right. So what would a typical transaction be? What’s your first-time buyer buying this place for? Can you just tell me a bit about the economic model and how that works?
Roy: Yeah, for sure. For example, one that I recently did was in the $350,000 price range (and that’s the price that we can buy it at today). When we add 5% cumulatively each year for the three years, that means the tenant will buy it from us for $405,000 approximately three years later. So you can see the difference there that the investor’s going to make. Also, at the same time, because the investor takes a mortgage on it, and the mortgage is getting paid down each month, I think it worked out to roughly another $22,000 or so that would be paid down in the mortgage. So that’s the equity gain that the investor is getting. Then we work it out that the tenant put down $5,000 up front so that they have some money in the game. They also paid an extra, I think in this case it was about an extra $600 each month over and above the going rent to go towards the down payment so that they would save up enough that when they came to buy it three years later, they would have approximately 7% down. So they could do 5% as a first-time buyer in this case, and then also have a little left over to pay any legal fees and that kind of thing.
Glenn: Right. And then what would the rent be? What’s the market rent for something like that?
Roy: Market rent on something like that here would be $1,500 a month (so plus $600 – now they’re paying $2,100 in total).
Glenn: Right. And the owner pays the taxes and the water probably, and the tenant would pay all the other utilities? Is that how it works?
Roy: Yes, exactly. Tenant pays all of the utilities and the owner pays the taxes. If it’s a condominium, the owner would also pay the condo fees.
Glenn: Right. So the owners financing this – how much are they putting down typically?
Roy: We always calculate it with 20% down. Sometimes they’ll put a little bit more. It is up to the choice of the investor. But if they put 20% down, we’ve calculated that generally it will work out to approximately 30% return on the money they put down by the time they cash out when the tenant buys the house from them three years later.
Glenn: And that’s 30% per year for three years.
Roy: Yeah, 30% per each year.
Glenn: That’s pretty good, isn’t it?
Roy: Where else do we make as much money, right? And the investor’s protected because he owns the property. Of course, the other side of it is, you have a tenant, so will the tenant ruin the property? That’s what people worry about when they think of rentals and tenants. The reality is, when someone has in their mind that they’re going to buy this property, that this is their home, they’re generally improving the property and making it better and taking way better care of it than if it’s in their mindset that, “Oh, it’s just a rental. I don’t own it.”
Glenn: Right! I mean, who better to take care of a property when they know it’s going to be their own in a couple years, right?
Roy: Yes. And every rent to own doesn’t work out. The ones that have not worked out are usually when the family has split up.
Roy: We always really want to make sure it’s a win-win for everyone, so we ask the tenants, “Are you on solid ground? Is your marriage very solid?” And even doing that, there’s the odd one where they still split up because things change over time, and there is a three-year time horizon. One of the ones we had where they split up, the people had improved the house so much that when we sold it, we actually got more than the anticipated price at that time, and we refunded the difference to the tenants each 50% so that they got back some money they put in, because we all benefitted.
Glenn: Right. So it’s like a win-win-win. So if that happens, say, after two years, do they get that extra $600 a month back too? Is that a lump sum to them? Or what happens? The money that was building towards their down payment – does that go back to them too?
Roy: Part of the program is that they do not get those funds back, and the reason for that is because the way the program is structured, they’re buying it direct from the investor after the three-year mark, so there are no additional fees other than lawyer’s fees at that time (just the regular closing costs). However, if they don’t complete, then the investor now has to hire a realtor to sell that property.
Glenn: Oh, I see.
Roy: And most of those funds then go to pay for that expense.
Glenn: I get it. Okay. So it sounds like it’s a pretty cool win-win-win deal for everybody. As long as everyone just did what they said they were going to do when they were going to do it and the way they were going to do it, then everyone wins in this deal.
Roy: Exactly. Yes, we’ve had many that have been very successful. Recently, with our market here in Kitchener going up substantially in the beginning of 2017, values went up 40% over 2016. And even 2016 was 16% over 2015. So these numbers are way above the 5% that we had calculated each year. The rent to owns that we had completing in 2016 and 2017, those tenants were absolutely amazed when they got the value of their home compared to what they had to pay for it.
Glenn: Yeah. That’s so amazing. It’s a lot easier to get amortgage, too, right? 7% down when you’ve already got $100,000 or $200,000 in equity built.
Roy: Exactly. It makes it so much better for them, and then they say, “You know what? I’m so glad that I did this and I didn’t wait,” because their other option was they could just go and rent for three years, and then buy it when their credit is fixed.
Glenn: Right. Yeah, but we know what happens there. A lot of times people won’t have the same discipline to put the $600 away or to save for the down payment, and so then they just become renters a lot longer than they thought. And then imagine if they were just renting and didn’t do this program. Now it’s like, “Okay, I’m ready to buy” and prices are up 16% over one year and 40% over the next. Now they’re just marked right out of the market. So your program is really a hedge against the market for anybody who wants to do it.
Roy: Yes, it works extremely well when the market continues to climb. According to CMHC and Genworth, they’re saying that they expect our markets to continue to climb because the demand is going to continue to outstrip supply for the next 10 years is what they’ve said at the most recent meetings I’ve been to.
Glenn: Right. Okay. So where do you want to bring this business now? What’s your next step? Where do you want to go?
Roy: I want to continue to offer it to even more people. I need to figure out how to reach out to more of those mortgage brokers. I think that would be one of the best avenues, because it really is something that we offer for all of Ontario. We’re licensed for all of Ontario, and pretty much all of Ontario makes sense. We don’t want to go somewhere where we believe the market’s going to go down, because it doesn’t work well when the market goes down. However, the majority of Ontario is expected to continue to rise in values, and as long as that’s the case, we’d like to offer it pretty much all across Ontario.
Glenn: Okay. That’s awesome. We already talked about how you lead generate now, but how do you think you’re going to have to lead generate to bring this right across Ontario?
Roy: I think we’re going to have to get to more of the mortgage brokers, because when I look at where most of my leads have come from, even though we get a great number through the Internet, an awful lot of those ones think that you just pay regular rent, and you get to own the house at the end. They don’t understand the program, and when we explain it for them, it’s not right for them. But a mortgage broker who has someone who has a blemish on their credit knows they can be in good shape in three years. That’s a qualified lead. So I think our avenue needs to be to reach out to mortgage agents.
Glenn: Okay. So I’m going to give you three really cool ideas adding onto what you just said there, because I think they might solve a bit of this gap. One, I would strongly suggest that every person you’ve actually done this to who’s really happy, you text them and ask them to call in and leave a voicemail of basically a testimonial – “This is my story” – within two minutes. I find a lot of times in real estate, we get a lot of Thank You notes from our clients, and then if we go to put a camera in front of their face, they just freeze up. There’s nothing. A great way to get around that is to have them leave a voice recorded message of what it was like, which you upload to YouTube. And what you can do is even run graphics with it. I think it’s a great way for you to be gaining the authority of third-party opinion of what you guys are doing, because I think what you’re doing is amazing. People don’t always have the time to read, and a lot of it’s video now. You can put your testimonials on your site, but there’s nothing better than hearing that person’s real voice talking about how amazing it was to deal with you guys, and how you guys kept your word. You can imagine the story they’re telling, right? “Well I bought this place for $350,000 three years ago, and when we closed the deal, the property was now worth $550,000. So I’ve really made $200,000 for doing nothing apart from just paying rent on this rent to own program.” There’s nothing more compelling than that for the next person who’s thinking about doing it to really get excited about it. Does that make sense?
Glenn: Right. And then I think the second thing would be, what if you produced a book? Whether you go to 90-Minute Books or a big book, I think the easiest one would be the 10 questions you get asked about the most from mortgage brokers about this program. Could you do an hour and a half voice recording (like at 90-Minute Books), and publish it? I would probably call it “The Mortgage Broker’s Guide to Rent to Own Properties.” They can be handing that out to all of their customers, and now they become the authority recommending you all the time.
Roy: Wow! I love that idea.
Glenn: Does that make sense?
Roy: Yeah, that’s fantastic!
Glenn: Yeah! And now you can also send this to every single mortgage broker in the province. Who’s not going to read that if I’m a mortgage broker? Why would I not want to read that article?
Roy: Yeah, that would be excellent. That’s a great way to get their attention.
Glenn: Yeah! They could buy the book off you for $5 each or $10 each or whatever. You could put it on Amazon. There are lots of ways you can get this out. You could also create a Facebook page called “The Mortgage Broker’s Guide to Rent to Own Properties” where they come as mortgage brokers, and all you do is talk about testimonials. You could even do a webinar on this for them using Zoom or one of those other video products, where everyone can join on. You’ve got a whiteboard, and you can just do the math and show them how this works.
Roy: Awesome. That’s a great idea, because it is nice when you show the math and you lay it all out on a whiteboard. It does really help people understand.
Glenn: Yeah. As you were explaining it to me earlier on this call, you were like “Well this is an absolute no-brainer win-win-win situation for everybody.” So the only difference between your target market and them being a customer right now is the information that’s required in the first five or 10 minutes of this call. You could send this podcast out to all your mortgage people, couldn’t you?
Roy: Oh yeah. That would be great.
Glenn: Right? The other thing I would do is go direct to the consumer and do something called “The 10 Secrets to Renting-to-Own Your Own Property.” And again, it’s the same model. It’s the 10 questions that people ask all the time, like, “What’s involved?” “Is this a scam?” “How does the program work?” “What’s a typical model look like?” Are there 10 common questions you get asked about this program all the time?
Roy: I’m sure there are. I could put that together for sure.
Glenn: Right. And again, you can record that and then put that out as a book. And when you’ve got the book, you become the authority, right? It’s a second positioning in marketing of authority, where people go, “Oh my God.” Then, when people ask you, “Well what do you know about it?” you’re like, “Hey, I wrote the book on this.” Right? It’s so funny.
Roy: Yeah. Actually, I like that idea, because it really does say you’re the authority.
Glenn: It does, right? And then you could do seminars about this, but I think the seminar model is slightly changing. Some people will show up to seminars, but a lot of the Millennials are going to be online. They will watch a YouTube video about it, and the YouTube is just you explaining the program with the offer for the free download of the book so you can capture their email address. Then you can just be dripping on them until they’re ready to go. So you have the video testimonials of all these people, building up your content, so Google’s picking it up, going, “Boy, this person’s an expert.” But what if you were to do, like, “Here are the 10 Best Rent to Owns of 2017” and you say “They bought them in 2014. This was the price. This was the return for the investor. This was the return for the tenant. And if you want to be on my list of the Top 10 Best for 2018, give us a call and we’ll get you set up right now.”
Roy: Oh, yeah. That is the best, to show them examples of exactly how well it’s worked out in the past.
Glenn: Yeah! What an incredible public service, in a way, you’re doing on this. And I don’t want people to think, “Oh my God. Really, Glenn?” I mean, it’s a win-win-win for people who might even just have slightly bruised credit or just haven’t saved up a down payment yet. Why deny those people the chance for home ownership? And I’ll tell you, on a personal level, when my parents immigrated to this country, I wish someone had told them about this rent to own, because we were renters our entire life.
Roy: Oh wow.
Glenn: I think I was the first one in my family (both sides) to buy a house, just because of the background we came from. So think about all of those people right now who are sitting paying someone else’s mortgage, in a crappy apartment building that hasn’t been maintained. Whether it’s because of rent controls, or whatever, they’re not just spending that money anymore, or they’re putting in new railings or windows because they can jack their rents up. And now it becomes almost this cause, right? It’s like, “You know what? It’s time for you to get rid of your landlord. Why are you building wealth for your landlord when you can build wealth for yourself?” This is how ridiculously simple this is, right?
Roy: It’s so true, and there are a lot of investors ready and willing to invest in this program because they’re protected by owning the house, and they get a better tenant. And it’s a nice in-and-out strategy for them that happens usually within three years. But I also wanted to mention one of my greatest successes, which was one that we did only for one year. It was actually a client of mine who was getting a divorce, and the wife wanted to stay in the house in the neighbourhood so the kids would go to the same school. She had a new boyfriend who could not come on title for a year because of his own divorce, yet within one year, everything would be fine and they could have the same house she was already in. So when I recommended to her the rent to own program for one year so that she wouldn’t even have to move the kids out of their bedrooms, she was just absolutely flabbergasted with joy and gave me the biggest hug. We put the deal together, and it worked out perfectly, and to this day, she’s one of my raving fans for the program.
Glenn: Oh my gosh. That’s such a great story, Roy. It could be another book! “The Divorced Parent’s Guide to Rent to Own and Keeping Your Kids in the Same School District.” They could be so targeted, right? The other one, if you think about it, is you’re almost creating your own MLS system, which is what I love about this. You get the buyers and you’re matching them to the sellers. And then you’re doing a third transaction, basically, when the buyer buys off of that seller, right?
Glenn: What if we did the investor’s guide? – “The 10 Secrets Investors Need to Know About Rent to Owns.”
Glenn: Because you need more capital, right? I mean, if you had $1 million in capital, you could easily do at least 20 or 30 more transactions just on your own, right?
Roy: Yes, exactly. That’s a good idea.
Glenn: Yeah. So if you imagine you’ve got this lake, right? Now we have three rivers coming into it, which are your source of leads. You’ve got the mortgage channel because you’ve taught them how to do it. You’ve got the buyer channel. And you’ve got the investor channel coming in. I think the next thing, which would be really cool to do later on next year, is a tour across Ontario to different real estate offices, talking about the rent to own model, and just trying to find that one key person to build your pipeline to be expanding it into every area. Just like in Burlington, you had to turn up your lead funnel a couple of months before you actually got in there. Couldn’t you just do this in every city across Ontario? If you could even make $100,000 to $200,000 per city and you get 20 of those going, that’s a $4 million business right now.
Roy: Well, it certainly would be, and it is an excellent idea, because I’ve found that the average realtor doesn’t understand rent to own. Even in my own marketplace here, other realtors (even in my own office) have said, “I know you do rent to own, Roy, and I have this person who can’t get a mortgage. Can you do a rent to own for them and pay me a referral fee?” And I happily do that. They can actually do it themselves, but they generally don’t have the investors that are ready and understand the program, and they don’t understand the program themselves. But yes, I’d be willing to share it, and it would be a good topic that I should put together a session on to do at each of the Keller Williams offices.
Glenn: Yeah. Or it could be other offices, too, right? You don’t have to limit it. That’s the beautiful thing. And then there’s another book, right? Now it’s “The Agent’s Guide to Rent to Owns” because you know you’re going to teach them how to do it, none of them are going to do it, but they’re going to send all their investors over to you to do it. So now you have another stream of income, right? So exciting! Imagine if you got this big enough, you could sell this to REIT (which is the irony of the whole thing), but you could sell this concept to a REIT or a pension fund because of the consistent earnings you’re making off of it, and they’ll pay you an 8-12 times multiple of all this.
Roy: That’s big!
Glenn: Yeah! I already know you’re a big deal, Roy, but now you’ll be an even bigger deal, so maybe I’ll get you to sign my arm next time I see you.
Glenn: So how was that? Did you get some good ideas?
Roy: Oh, yeah! I’ve written them all down while we’ve been talking. These are great!
Glenn: Alright! Well I’m excited for you, Roy! You’re already doing fantastic things and serving so many great people with this win-win outcome. And look at just how many more you can serve, right?
Roy: It would be good to serve more, for sure.
Glenn: Yeah. So excited for you, Roy. Well, thank you! Thanks for joining us today! It was really cool.
Roy: Well thank you, Glenn. It’s been my pleasure.
Glenn: Okay. We’ll talk to you soon, Roy. Take care.
Glenn: Bye bye!