Ample Supply of Properties in NYC is Creating a Rent to Own Opportunity
Supply and demand is a relatively simple concept. According to the Intelligent Economist, when quantity supplied increases but quantity demanded does not increase, market forces lead to a drop in price.
Keep that in mind, when we say that in New York City, 25 percent of all new housing created since 2013 has not been sold, according to a New York Times article. Developers are continuing to create new luxury housing, but consumers aren’t buying it at the quantity supplied. As a result, prices for luxury apartments in New York are beginning to drop and developers are considering different tactics to move their properties off the market.
Rent to Own as a Solution for Excess Housing Supply
Developers use rent to own as a tactic to sell luxury real estate when demand is low. Rent to own can make purchasing a luxury apartment more affordable – to an extent.
Rent to own gives people who might not have otherwise been able to afford a luxury apartment in the city the chance to do so. These properties will still cost millions of dollars for buyers, but the rent to own strategy allows people who are up-and-coming to take their time saving for the purchase of a luxury unit while taking advantage of lower than normal pricing.
Lease-options also help qualified buyers who are unsure of whether they want to purchase a property in the city take the time they need to decide if it’s the right move for them. The easiest way to make that decision is to live in the property for a test run – an opportunity unique to rent to own.
Through the rent to own strategy, developers can increase the quantity demanded by expanding their target audiences.
What is Rent to Own
Rent to own is a program through which a potential buyer rents a property with the intention of purchasing the property at the end of a set lease term. If the buyer wants to purchase the home at the end of the term, the seller must sell to the rent to own buyer. However, if the buyer doesn’t want to purchase the property, they can simply walk away – losing any incentives that purchase would have given (i.e. rent credits, the option fee, etc.)
When a buyer rents to own, they pay an option fee to retain the first option to purchase the property throughout a set lease term. The option fee is typically around 3 percent of the property’s full cost.
Basically, if the lease term for a property is set for two years, the option fee guarantees that for those two years, the seller will not accept offers from any other buyers. Giving the buyer the time and space to save up for the purchase and confirm that they want to purchase the home.
Should the buyer choose to purchase the home, the seller will return the full option fee for the buyer to apply to the down payment on the property. If the buyer chooses not to purchase the home, the seller keeps the full option fee.
During the lease term, the buyer pays the seller a monthly rent payment – typically, fair market value for the cost of the home.
The buyer may negotiate that the seller holds a certain percentage of the rent payment in escrow throughout the lease term. Then, if the buyer chooses to purchase the property, the seller returns the escrow money to the buyer so that the buyer can apply it to the down payment of the home. Should the buyer choose not to buy the home, the seller keeps this money as part of the rent payment. Note: buyers must negotiate for this opportunity, it is not a standard part of the rent to own contracts.
The program gives a lot of benefits to buyers, and that’s why developers consider it a good tactic for increasing quantity demanded.