I’ve written a number of articles about domain name leasing. I’ve discussed the benefits of leasing a domain name, and I’ve also discussed the downsides of domain name leases. In 2009, I also wrote about additional problems with domain leasing.
In the last three or four years, I’ve leased a few domain names (as the domain name owner), and I’ve also discussed lease deals on a number of other domain names. For the most part, the deals either didn’t make sense to finalize or they fell apart after a drawn out negotiation. This has given me some personal insight into the hidden costs of domain name leasing, which I want to discuss today.
As the owner of the domain name, you need to be judicious in how your lease agreement is drafted. I would assume you are going to have an attorney draft your agreement, since not having legal advice for something like this would be like going to the supermarket for dental work. An inexpensive attorney might charge you a couple hundred dollars an hour, while most attorneys will charge more, and some will charge much more.
Domain attorney Zak Muscovitch had a great article about the considerations of a domain name lease agreement, and I think it’s a must read if you are contemplating a lease.
As you can see from Zak’s article, there are many things you and the person leasing your domain name must discuss. From my experience, most people who are going to lease your domain name will want to make many changes and requests to a standard lease deal, and that’s going to cost you. If you’ve looped an attorney in at the beginning (which is wise so you can get the agreement), and you expect his or her advice during the course of your negotiation, you’ve already added several hundred dollars (perhaps over $1,000) to your bill. Next, if you use a licensed escrow service, you might add hundreds of dollars more to your bill.
Before you have even started collecting payments for the domain name, you will likely be hundreds or quite possibly thousands of dollars in the hole. Now, if you are earning several hundred or thousands of dollars a month from the lease, it could be worth these hidden costs. If you’re like most of the people who have used the lease option because a buyer couldn’t afford your asking price, your lease is probably not going to cover the legal costs for a year or two.
We all have rosy thoughts when it comes to leases. We tend to think of these as sweetheart deals that will pay off over the long run. Unfortunately, many do not work out and all your hard work may go to waste after a couple of months of lease payments. At that point, are you going to sink more money into legal fees to try and enforce payments, or are you going to cut your losses?
Domain name leasing in theory sounds like a great idea. However, the hidden costs may not be worth it unless the deal is too good to pass u.
We have sample ideas on Leasing at our website.
Joint Ventures are mentally lobbed in with leasing. I believe joint ventures are superior to straight lease deals, for both parties.
Yes, but JVs require much more in-depth legal review since your domain name will be a part of a business. Lots of up-front cost with no guarantee of a reward.
For example, what happens if the entrepreneur is using your name in the name of a LLC, goes bankrupt, sells his rights to your name to his brother who forms another entity, de-values your shares, and your holding is worth nothing? If you have a good lawyer, you can prevent crap like that from happening, but there are lots of ways people can f-you over if you’re not covered. This type of protection costs $$$$, and most people won’t spend $5,000 on legal fees for a reg fee domain name when the payout may amount to nothing and it’s all contingent upon someone else’s idea and management/execution of the idea.
Yeah, joint ventures sound great, and they may prove to be great, but there are up-front costs, especially if you don’t have a lawyer on retainer.
You are absolutely right on the above concerns.
Joint Ventures and Leases, in my opinion, do NOT replace purchasing domains, and websites. It is a supplementary service, should only be adopted by astute entities.
Just like in brick and mortar, or even in personal life; some folks realize tremendous benefit from leasing their cars, or business offices; tax benefits, lower initial cash outlays, experiment, and so on…
And, I subscribe to the school of thought that the use of attorneys in complex issues such as this, is prudent.
The future of domain name sales, leases, and joint ventures is quite fluid at the moment. Things will be clearer as major players such as Microsoft, Yahoo, Amazon step up to the plate and change mass behavior. As long as status quo remains ante, search habits, and technology is inconclusive for domain names in general, category killer or not.
Excellent >>practical<< advice, Elliot.
The clients who tend to be the most successful in leasing domain names, have over time, come up with a formula for the terms and conditions that they typically insist upon, thereby being able to cut down somewhat on the drafting costs, and are also able to handle some of the negotiation of terms themselves. But as soon as you get into 'back and forth' with another lawyer, that is when costs can really go up.
PS – I love this part: "Like going to the supermarket for dental work". LOL.
Sometimes just closing a regular deal on a $2,500 domain can be hard work why would a lease be any different. Domain Leasing is a fantastic idea, I am glad folks are dedicating time and resources to developing this channel. But still a long way to go.
Another cost, I am finding there are tenants out there that would lease a $50k domain for $1k a month. But them what happens when a $50k buyer comes along while the domain is locked up in the lease. Maybe a bummer. Depends on the preferences of the seller.
That’s true, but keep a couple things in mind:
1 – When closing a difficult $2,500 deal, you’re probably busy negotiating and/or convincing the buyer that it’s a wise investment. The only cost is your time. When negotiating a lease, you probably need to discuss issues with a lawyer, and in addition to your time, you are most likely paying your lawyer.
2 – When you close a domain deal and are paid, you are free and clear (unless there are issues with the domain name – perhaps misrepresentations to the buyer). With a lease, things may come up down the road that will be time/finance sucks. For instance, if the leasee doesn’t pay, goes bankrupt, does something illegal with the domain name…etc. All of those issues will cost you money to resolve.
This all domain leasing thing doesn’t seem to add up. Yes, they’re will probably always be a few of those flying around, but it just seems like a big hassle for all parties involved.
Especially for the lessee, it’s hard for me to see the upside in anyway. Yes, it might give you an access to a domain name that you wouldn’t be otherwise able to get, but building your brand on something that you don’t actually own just seems extremely risky.
While real estate analogy is quite apt in general, and certain physical location can surely strenghten a brand, that location will always be just an extension to your brand. However, a domain name is not just an address, it’s in essence a name, a name by which you/your brand is recognized online.
I would imagine that a wise business owner wants to have total control over the very thing he is building, i.e. a brand.
Leasing is not for every scenario, Elliot seems to have a negative spin on leasing based on the majority of his articles.
I can tell you about a domain I picked up in the aftermarket for $2xx or so, I recently leased it for $60 per month, I was fortunate to come across a good contract, which works for most cases… it is a domain I do not have much invested in, but it is great cashflow, $8, into $720, since they prepaid first year upfront, I am already in the black. To be successful going forward their will be no single strategy that works. But if I can have 100 little leases like this working for me, and still retain my asset, all the more power to me. You can have your cake, and eat it too, not sure why Rick S gets so much flack for this, really until he started talking about it, was really a taboo subject nobody really gave a damn about. Simply a smart idea, sure we all need nice lump sum cash deals to keep going, but having cashflow come in every month, while maintaining, and building assets is great after a set point.
I am not negative on leasing if the deal is right. Sometimes people/companies on the other side of the table don’t want to deal with legal fees either, and if you present a fair deal, they will take it.
That is especially true if you have a great domain name and are firm with what you are asking. If they need your name and you won’t budge on terms, they may agree to close the deal, especially if there is an option for them to buy the name in the future.
One final thing is that much of this is applicable if you have a 6 figure name with a $5k/month+ lease. You’ll make up your legal and escrow fees in the first month or two.
Much of what I am writing is regarding low value names with $xx-xxx/month lease deals I hear people discussing, and my first thought is always that it will take almost a year to cover the legal fees alone.
I think leasing can be a good way to earn a steady monthly income, but I don’t think it’s the panacea for what ails the domain market.
And for all you little guys out there, don’t go chasing after lawyers, and paying them hundreds of dollars, this is what is wrong with America today, overpaid lawyers, making you think you need them, If you are smart, and know how to read, and write, you can figure this out on your own as well, for smaller sized deals.
I think that’s bad advice if a domain name is important to the “little guys.” I might not care enough to involve lawyers in a deal on a name I bought for $2k, but for many people in this biz who read my blog, a $2k investment is very large and a problem with a deal that ties up the name could put them out of the domain business.
Elliot I enjoy reading your well written blog.
Why has no one mentioned the obvious.
Namely, the same dreamers that want $200,000. for their $5000.00 domain names are now asking (dreaming) for $3000.00 per month for the domain name.
I have checked out most of the larger domain leasing websites and very few have anything near realistic lease prices.
It may make the domain owners feel warm and fuzzy but very, very few domains will be leased at current asking rates.
They say that the domains are prime real estate and you get pure generic traffic from owning them.
Realistically, you can expect very little direct navigation traffic from most.
I know as I own many tier1 generic domains.
Those days have been slowly declining for years. To the point now that only massive one word wonder generic .com get any significant amount of type in traffic.
So where is the real value proposition of leasing? Sorry just do not see it.
Just another way for domainers to keep the dream going.
Thanks for the compliment.
In the majority of situations I’ve negotiated leases on, the person/company wants to buy it for a new project or company but can’t afford to pay full price. They can, however, afford monthly payments with a buy out option if they’d like. This gives them the assurance that they can buy the domain name if they wish, and until that point, they can lease the domain name. It allows them to use their funds elsewhere at the startup, and it allows me to earn a passive revenue with the hopes of a larger sale at some point down the road. Keep in mind different owners will want to negotiate different things.
“it allows them to use their funds elsewhere at the start up”
Okay, that makes sense as long as thy have a firm buyout price, if their start up gets traction.
However, it does not address the crazy prices listed for leasing on various sites.
If you are getting no or very little built in traffic coming with the leased domain name, you might as while brand anything-cool-sounding.com and spend the money on marketing.
I do not buy the argument that a only a high quality generic dot com = prestige and credibility.
Creative marketing and a unique excellent product/service offering will give both.
Google,Twitter, etc, etc.
I love those dreamers because it makes my prices look better.
“Creative marketing and a unique excellent product/service offering will give both.”
Yes, but that can be expensive, time consuming, and if it fails, there’s no burndown value. For instance, if you go all out and buy a Super Bowl commercial that doesn’t get the necessary ROI, you can kiss that marketing investment goodbye. If you spent the same $1m on a great domain name + website, if the business fails, you can probably get close to your money back on the domain name, and perhaps more if you had some traction in search engines.
At the end of the day, the product/service is the most important thing for a company. A shitty product/service on the best domain name will still likely fail, although the domain name can be re-sold.
The biggest down side I see to domain leases is the fact that another entity controls and uses a domain that is technically owned by you, making you liable for any/all screw ups by the person running the domain.
A proper lease agreement can diminish the risk, but cannot remove it, specially in the scenario of confiscation by authorities etc.
Leasing is good for high value domains, low value domains make it too risky.
If the domain name is placed in an escrow account, it adds further protection.
We need a new law that establishes clearly that the registrant of the domain IS NOT responsible for how the domain is used. It is so simple. The visitor/user/customer of a domain name has to refer to the data published on the website (data that, at least in Europe, are mandatory for EVERYONE that use a website to run WHATEVER type of business: company name, address, VAT etc., all these data are mandatory, so why the registrant would be responsible for the activities conducted through the website?!?
All these are only words
You can do a leasing agreements with ALL clauses to protect the lessor: the lessee will accept or no deals. Full stop.
The unique risk is represented by the intermediary who will keep the domain and will have to judge if the lessor is doing something bad, according to all conditions described in the “full of protective clauses for the lessor agreements”, or not. This is the only risk, and this will select the most affordable Domain Leasing Escrow company
All the others are only words to protect the business of lawyers….
I guess you could go that route, but if both parties want to make the deal happen, concessions need to be made on both sides.
You don’t sound like you’re from the US. Here, it seems that there are more litigious people, and that means domain owners need to be more proactive in protecting their assets.
Btw lawyers use software to write their agreements, software which suggest them clauses
The leasing platform can easily add this option so lessor and lessee can add or remove some (few, to maintain the agreement much protective for the lessor) specific clauses from their agreement.
My accountant uses software to do my taxes, but that doesn’t make him any less useful to me.
Even with his software, I wouldn’t want to do my own taxes.
This just came across my desk and I think you will see this begin to spread like wildfire. Once domainers see and understand what they actually have, they are going to look at everything they do differently.