Rent to Own Programs – Are They Making A Comeback?
June 1, 2016 by Natalie Heller |
In the 1990’s, small business owners typically oversaw the rent to own housing market, leasing out homes with the option to buy. It was quite common for consumers with weak credit to try out rent to own. However, within the next decade this type of leasing lost popularity; lenders started becoming more flexible in lending out money to prospective homebuyers. Nowadays, rent to own programs seem to be emerging from within the housing market. Lenders are starting to create stricter regulations on borrowing, which is making it harder for those with poor credit to obtain a mortgage.
Wall Street firms in recent years have begun to profit from these types of investments. Many seek out consumers with damaged credit, renting them homes with option to buy. One of the most prominent lease to own programs, Home Partners of America, was founded three years ago by William Young, a former Goldman Sachs executive. Young saw a potential market, assisting those who had been pushed out of the housing industry. Home Partners of America spent $100 million to buy 320 homes in June 2015, and by the end of 2015 it received a $500 million equity investment. Investors believe the company is sustainable and will be profitable over the long-term, given today’s inflexible mortgage lenders and few other alternatives to home buying.
Here’s how Home Partners of America works: first the customer is assigned a real estate agent and selects a home within an approved location. Usually these homes are in suburban areas and cost around $100,000 to $725,000. The company will purchase the home and then lease it to the customer for up to five years. Unlike most rent to own programs, Home Partners of America gives customers the ability to walk away from the agreement without a penalty. However, there is a markup on the homes the longer it takes for the customer to purchase the home. For example after 1 year, a $449,975 house in Chula Vista, California can be bought for $472,035. But after 5 years, the home will be marked up to cost $573,762. These increases correlate to the inflation in home prices. According to the S&P/Case-Shiller Home Price Index, which covers all of the United States, home prices rose 4.4 percent in the 12 months ended in May.
According to the Wall Street Journal, many home buyers are motivated to use a rent to own program because of strict government policies and frugality of banks. Nowadays, buyers need to have higher credit scores than were needed in the early 2000s to acquire a mortgage. According to Zillow, the homeownership rate for middle class Americans has fallen to 63 percent from 69 percent since 2000. Home Partners of America isn’t the only rent to own program seeking to make a profit off of this niche of customers. HomeLPC, based in New York and founded by a Lehman Brothers banker, launched last year and has expanded to over five states. Another New York firm, Premium Point Investments, is currently planning to launch a rent to own business in the Southeast part of the nation.
It is still doubtful whether or not rent to own will prove to be a long-term, profitable industry. Historically, companies who utilize this type of leasing have not seen many tenants become homeowners. Some tenants aren’t able to the improve their credit, while others can’t save up for the down payment. However, the recently emerged rent to own programs mentioned above seem to have a good strategy. By specifically targeting middle class and wealthy customers who have established careers and a good financial history, it increases the chances of these tenants being able to fix their credit and obtain a mortgage over one to five years. For more about achieving success with rent to own, be sure to look at our 4-Step Rental Strategy for Lease to Own Success.