Rent-to-own
What do you do when you’ve got a lovely, empty condo?
Ready for immediate occupancy!
The worst thing the condos can do is sit vacant for a protracted interval. Not only does this cost you operating money, an unoccupied property feels unloved, and people shy away from moving in there. So, as illustrated by this recent Boston Globe story, you offer a ‘test drive’, by inviting people to become renters in hopes of later becoming owners:
The Carruth, a mix of affordable apartments and market-rate condominiums in
Only three sold, plenty for rent!
So, developer Trinity Financial Inc. of Boston decided to offer the units as a variation of rent-to-own – leases with an option to purchase at a potential discount.
“We’ve had great success with it so far,” said Abby Goldenfarb, project manager for the developer, noting that nearly all of the 20 new renters have signed up for the purchase option. “We are really trying to respond to the market.”
Rent-to-own’s basic concept is fairly straightforward: you want to buy the condo, and I the owner want you to buy it.
Everybody wants this: owner, renter, lender
Right now, credit tightness makes it impossible, because you don’t qualify for a sufficient mortgage in today’s conditions. Meanwhile, you need a place to live, and you can certainly pay rent. So we agree on the basics.
In today’s tight credit market, rent-to-own can be attractive to parties on both sides of a housing deal. For developers, it brings cash flow to properties that otherwise would be stagnant. For hopeful buyers, who may be struggling with poor credit or a recent foreclosure, it is a way to rebuild credit worthiness and start on the path to homeownership.
Compared with ownership, rental is a much less complex credit decision: you pay the rent or I evict you, and I easily recover vacant possession of the apartment.
“It is our belief that a good number of folks who have been foreclosed on are good people who fell prey to unscrupulous mortgage brokers,” said David Rodriguez-Pinzon, chief executive officer of Economic Development Financing Corp., a
I don’t know what percentage of potential rent-to-owners are recently dispossessed. But that doesn’t matter – what matters is an occupied apartment and a happy household.
This makes rent-to-own a hybrid in terms of the benefits of homeownership:
· Unlimited appreciation. Negotiable. Depends on deal structure.
· Right to sell. No. You can’t sell what you don’t own.
· Financeability. No. You don’t own it, remember?
· Controllable occupancy cost. Yes. A clear benefit.
· Improvability. Negotiable. Something to negotiate, in fact.
· Secure tenure. Yes. More solid than a straight rental, in fact, as the landlord has made ultra-clear that it would like you to be in the condo when the conversion comes.
Thus you have secure tenure and controllable occupancy cost – big pluses – and some chances for appreciation and improvability. But as you’re not the owner yet, you don’t necessarily capture upside, and you probably cannot make major structural changes in your apartment.
Unless, that is, you negotiate for these features, based in part of the financial bargain you’re striking around the rent-to-own choices, such as the following:
Posturing required
I’ve previously written about the nuances of rights of first refusal, but the best right of first refusal is the practical one of incumbency.
Economic Development Financing Corp., also known by its initials EDFC, is using rent-to-own in three projects now under development. They are the 82-unit downtown Brockton Renaissance Village on the site of two former shoe factories; a downtown
The arrangements offered by both Trinity Financial and EDFC are not pure rent-to-own. Renters are not legally bound to purchase, and portions of the rent are not earmarked for down payments.
These very generous terms suggest that the sponsor’s principal motivation is not in fact repairing damaged credit – if that were the obstacle, the sponsor would have asked residents to sign a forward P&S, and the residents would have been able to make top-up payments beyond the rent.
At the Carruth and the EDFC projects, the arrangements are that renters have the option to purchase their units later at a pre-determined price.
No, this sounds like a rental incentive, pure and simple – move in here and you’ll get a fixed-price call option on the apartment.
If real estate values climb in the intervening time, the renter would be able to buy the property at a discount.
And Carruth developer Trinity Financial is exploring the possibility of deals in which portions of rental payments would be applied to down payments, according to Goldenfarb.
A more flexible way to achieve the same result would be to allow residents to make payments over and above a stipulated rent, with the excess being escrowed as a down payment on the eventual purchase. Since residents can do this themselves, simply by putting their money in the bank, the develop would need to add a sweetener – like, applying each dollar of deposit not only as down payment but also as a dollar-for-dollar reduction in the eventual purchase price.
Reasons to rent?
With a little fiddling of formulas, the developer could incentivize the residents to save rapidly, fueling a faster conversion. Such a move would also please the developer’s silent partner – the condo construction lender.
What, you ask? What’s the condo lender got to do with this?
Ask not what your condo lender can do for you
Ask what you can do for your condo lender
The developer is in this pickle because the condos aren’t selling. The developer financed its construction with an interim loan from a lender who — hey, it seemed like a good idea at the time! – was convinced that individual condo takeout loans would prepay the construction loan. When the market dries up, the construction lender could foreclose, but then what?
We could always foreclose …
In effect, a condo lender who endorses a rental reversion with rent-to-own is tacitly (and presumably, explicitly) agreeing with the sponsor that it will extend its loan term.
More and more lenders will be making these choices, not so much around here in
When markets weaken, condos often slow down before single-family homes
While there are only a small number of rent-to-own developments in
“You see it in
Rent-to-own arrangements typically are offered in newly built condo developments in which units are not selling or are selling slowly.
“It is getting more difficult to sell at the speed developers need to recover their investment,” said Jon Gollinger, East Coast chief executive officer of Accelerated Marketing Partners. “There is cash flow that is needed when they are sitting there empty.”
Rental reversion also allows another bite at the apple – pursuit of rental or affordability resources that can provide needed cash to close the cost-value gap.
Rodriguez-Pinzon of EDFC said an added incentive for his company is the federal tax credit for historic properties. Under the rules of the tax breaks, developers must keep properties as rentals for five years, but afterward can offer the units for sale.
EDFC is seeking the tax credits for its Brockton development, part of which is in a four-story brick 19th century shoe factory, and its project in Worcester, which is partly in the city’s former Boys and Girls Club building.
From Boys and Girls to Owners’ and Renters’ Clubs?
Rent-to-own offers sometimes prompt suspicion, in part because of the poor deals consumers have gotten with furniture and home electronics, as well as real estate.
“The rent-to-own field doesn’t have a great reputation with affordable housing advocates,” said Tom Callahan, director of the Massachusetts Affordable Housing Alliance. “In the past, it has been populated by scam artists and fly-by-night businesses. The design of the arrangements are often skewed to not giving renters much.”
Your benefits, ma’am
Like any other contractual arrangement, it could be tilted. Care is warranted, but how badly can the residents be hurt, if all they’re paying is rent and getting an option to buy?
In addition to getting time to build or repair a credit history, potential buyers also gain from the opportunity to live in a place before making a big commitment. The Carruth has advertised its rent-to-own units as “test drives.”
“It can be a real win-win,” said Gollinger. “The real advantage to renters is they get to test it first.”
There can be pitfalls for potential buyers, according to real estate professionals. Rent-to-own typically is offered in areas where real estate values are weak, so buying in these areas can be risky.
Full or empty, these condos are in Bed-Stuy
That’s a concern when you buy, not when you rent. Indeed, moving in under a rent-to-own structure lets you find out if the neighborhood is good.
“Some of the lower-income areas are being hammered, so if you are a buyer, you want to make sure it’s a good piece of property,” said David Luczkow, vice president of business development for OptHome, an online real estate advisory firm based in Southborough.
The two developers testing it now – Trinity Financial and EDFC – both have good reputations in providing affordable housing in the area, according Eric Gedstad, spokesman for MassHousing, a state agency that finances housing construction. The agency provided a loan for the Carruth.
“We are definitely supportive of it,” Gedstad said of rent-to-own. “As the lender, we are gratified that the developer has cash coming in. It makes sense for potential homeowners. The more time that goes by the better the opportunity for someone to repair their credit.”
Spoken like a construction lender reconciled to extending the maturity date.
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