“Rent-to-own provisions, which would give existing tenants the option to purchase housing during their leases, could ease the transition of some tenants back into the owner-occupied market. Such provisions can also reduce costs by encourage tenants to keep their properties to a greater extent.

(Ben Bernanke, Chairman of the US Federal Reserve)

We are still in a housing crisis and people are still looking for solutions, including the head of the Federal Reserve. Not much is working, but Bernanke’s statement above makes a lot of sense to me. It also took me to a flashback of the TV Christmas special, rudolph the red nosed reindeer, and the island of misfit toys.

The island of misfit toys was the place where all the broken and imperfect Santa Claus toys that his elves spoiled were dumped. The toys didn’t meet the criteria of what good kids wanted, so Santa never delivered them and instead sent them to the dreaded island. It wasn’t the fault of the misfit toys; all they wanted was to be loved by children.

Then there were the poor kids who didn’t get any toys from Santa. They would have loved to have these imperfect toys to play with and love. But nobody knew how to make the exchange happen. The idea made a lot of sense (combining unloved and misfit toys with poor children who would love them), but the logistical plan was missing.

It is a similar situation in the current housing crisis. People cannot buy houses and, in turn, people cannot sell their houses (it takes two to tango!). So wouldn’t it make sense to unite the two biggest groups with the two biggest needs in today’s real estate market? Is it so:

1. “Want-to-Be-Sellers” (WBS): “Could someone make me a decent offer and buy my house? Please?!?! It’s been on the market forever and I can’t cut the cost anymore!” These payments are killing me and I am looking for a short sale or foreclosure.” (Or “I have broken toys that kids with money and credit don’t want!”)

2. “Would-be Buyers” (WBB): “I’d love to buy that house, but I can’t get a loan because of my low credit scores and lack of a big down payment. Banks just won’t lend to me!” (Or “I have no toys, but I want one to love!”)

So the Fed chief mentions leasing as a solution. Let Wanna-Be Buyers (WBB) rent-to-own Wanna-Be Sellers (WBS) homes (also known as rent-to-sale). Fence! Problem solved! If WBBs pay their rent on time and in full for a year or two, they qualify for a loan on the home they are in. If they don’t, they move out of the house at the end of their lease and rent another house to live in.

So why does this housing problem still exist? Because “rent to own” and “rent to sell” are not widely used yet. But with such a large group of WBB and WBS, how can this be? Why don’t real estate agents take the opportunity to work with them?

Surprise! The two main reasons are related to money:

1. There is no loan program (that I am aware of) that will give a low down payment and a low WBB credit score a mortgage based on rental history. (There is no money to transport the toys)

2. Realtors don’t think there’s enough money for the risk and headaches they think they’re potentially taking on in rent-to-own and rent-to-sell transactions. (There is no manpower to find the children without toys and deliver the toys to them)

The first reason could be solved with a government-sponsored tenant loan program. It would be based on the history of the landlord. Yes, I know I would be open to fraud, but the smallest brushstrokes would have to be worked out by people smarter than me.

The second problem is incentivizing the manpower to carry out the mission. Generally speaking, compensation for real estate agents is relatively simple. They help someone buy a house and get thousands of dollars. They help someone sell a house and get thousands of dollars in commissions.

But what about renting with the option to buy? The placement of WBB in homes normally only generates a nominal commission. For example, in Charlotte, 10% of the first full month’s rent is a common commission rate offered. So the math isn’t that great for real estate agents; for filling a house that rents for $1,000, they earn a commission of $100. At $4.00 a gallon for gas, that’s not going very far. Agents then have to wait for their WBB to buy the house in a year or two so they can earn their much larger sales commissions. That is difficult to follow, it is uncertain that it will happen and you do not pay the electricity bills today.

Hypothetically, if the fee structure were to be changed (raised by banks and the government?), it would be interesting to see what would happen. If realtors got $3K for listing WBBs on WBS homes, that would drive interest. So if they were also given the sales commission if the WBB ended up buying the houses, that would make it even more attractive. I imagine the WBB will be shown the WBS houses pretty quickly!

I think this would also be a significant bargain for homeowners, banks, and the government (which still has tons of delinquent mortgages). It has the potential to stop the erosion of home values ​​and become a true win-win-win for WBB, WBS, banks, real estate professionals and our country’s neighborhoods. It would also create jobs and get money flowing into the housing sector.

The only thing missing is the funding for the tenant loan program and the commissions for the real estate agents. In Island of Misfit Homes, it worked out well because Santa and the elves worked for free on a handshake deal. In real life, we need the government and banks to step up with incentives and cash guarantees.

Filling vacant houses that are not for sale (WBS) with renters who want to buy them (WBB) seems to be the solution that worked on Island of Misfit Toys. Is Bernanke willing to pay for the transportation and delivery of the toys?