Photo: Bloomberg Television
During a speech this month before the National Association of Homebuilders, Fed Chairman Ben Bernanke shared his views on ways to escape the nation’s foreclosure crisis.Among the ideas in that speech (as well as in a report to Congress in January): rent-to-own properties.
“Rent-to-own provisions, which would give existing tenants the option to purchase their properties during their tenancies, might facilitate the transition of some renters back to the owner-occupied market,” the report says. “Such provisions may also reduce costs by encouraging renters to maintain their properties to a greater extent.”
Commercial banks and savings and loans in the U.S. own more than $11 billion in housing stock, a share of the marketplace referred to as real estate owned, or REO, properties. Bernanke supports the idea that a share of these creditor-owned properties be offered as “rent-to-own” properties rather than linger on the open market.
It remains to be seen if banks will take Bernanke up on his suggestion. But the concept of rent-to-own and lease-to-own housing may be gaining traction among individual buyers and sellers.
Hard numbers on how many such properties there are isn’t easy to come by — the National Association of Realtors, for example, doesn’t keep a tally.
Nevertheless, Brett Furniss, president and owner of BDF Realty, a Charlotte, N.C.-based firm that specialises in rent-to-own properties, says there has been steady interest in these arrangements for the past few years.
“This isn’t a new phenomenon,” Furniss says. “When the market crashed in 2008, you started seeing more people looking at rent-to-own. I think the uptrend you are seeing now is because sellers realise that they can’t sell their house for market value, so they are willing to entertain rent-to-own tenants, whereas in the past they just wanted to get the property sold. They still do want to get a house sold, but it’s not a realistic thing anymore, so they want to look at other options.”
“If you live in a property you can wait it out,” he adds. “If it’s vacant, you’re just going to continue to make mortgage payments while the house sits on the market. Some people do that, but I think it’s crazy. You want to market your home to the greatest number of people out there, and the greatest pool of people out there are renters and renters that want to be buyers. I don’t know why you would continue to go after a diminishing pool of buyers who are so picky in this market. It is such a great buyers’ market, and sellers are just getting killed.”
Under a rent-to-own arrangement, a seller agrees to take on a tenant with the understanding that they will have an option to buy the property at an agreed-upon price after an agreed-upon number of years. As part of that deal, there is typically an option-to-buy fee that can range from several hundred to several thousand dollars (be prepared for at least 5% of the home’s market value). An added fee may also be tacked onto rent payments that goes toward at least a portion of the future down payment or purchase price.
The buyer benefits by having a stake in a house they want and time to sort out their financial affairs. This may be a particular concern to many first-time buyers now that lenders, in the wake of the subprime crisis, are more demanding when it comes to credit scores and less willing to consider down payments of less than 20%.
“From the seller’s standpoint, they have somebody paying the mortgage for the next two to three years,” Furniss says. “If they buy it, that’s great. But if they don’t, they are at least, hopefully, out of the woods as the market swings back. Also, I don’t think [owners] calculate the amount of money it costs for a vacant house. There is the risk of vandalism. You have to have utilities and taxes. You have to maintain the lawn. There are many costs associated with it that people may not think about — not to mention the mortgage payment.”
There are potential risks for buyers and sellers. A housing recovery could lead the seller to take a loss on the agreed-upon purchase price. The seller, if they back out of the deal, may avoid the hassle of otherwise defaulting on a mortgage but still forfeit the added funds earmarked for a planned purchase.
A risk for both parties is that, at the end of the lease, the buyer still may not have saved enough money or earned an adequate credit score.
Buyers also need to be assured as to how their “option” payment and fees will be credited when they buy the home, or how much is refundable in the event they don’t. It is also important that they understand — and have in writing — the terms for how long the agreed upon, “fixed” price will be guaranteed them.
As with any major purchase, a legal review of the contract is crucial, and that document should detail the nature of the transaction clearly and spell out the renter/owner relationship (including who is responsible for repairs, maintenance and insurance). It’s advisable to have a home inspection performed, even if you don’t plan on buying the home immediately, as unfortunate discoveries could be reason to back out of or renegotiate the deal.
To avoid scams, renter/buyers should demand to see proof of the home’s ownership; many have been ripped off by sellers who pocketed their money even though the house was well on its way to foreclosure.