A toe in the ownership water: Part 1, the would-be buyers
There goes my wallet! And my ego with it!
The thing about falling prices is that even as commodities get cheap (have you looked at the price of gasoline lately?), our human desire not to look foolish to ourselves keeps us from buying – because maybe the price will fall even further tomorrow. Yet housing, distinct among asset classes, is something we all have to consume. How then do you sit on the sidelines on buying without feeling even dumber if the home of your dreams, which you could have bought for what will seem in hindsight to be a song, starts rising in price?
From the New York Times: WAIT AND SEE While they watch the market, Jill Vegas and her husband are renting a 23rd-floor apartment at Northside Piers with an option to buy
Jill Vegas, 37, an interior decorator and stager, and her husband, Michael Zimberg, 35, a director at BNP Paribas, a bank, are wary of the market and wonder how long it may take before all of its problems are sorted out.
“I think this building may hold its value,” Ms. Vegas said, “and when I look out the windows of my two-bedroom apartment I see beautiful, unobstructed views from the 23rd floor.”
How did the owners persuade an affluent skeptic like Ms. Vegas into their condo? As profiled in this New York Times story, by innovating the financial form:
WHEN sales began almost two years ago at the first Northside Piers tower in
I love loaded words like ’snapped up.’
Moving fast to snap up those bargains!
Especially when they’re applied to phrases like ‘two years ago’ and ‘more than 20%’. A good condo development should have a fairly large pre-sale percentage – normally it’s prescribed in the loan documents – and twenty percent is low.
Northside in September, 2007
They may have been drawn by the sweeping
Atop Northside: your own cabana
But then came the credit crisis and the meltdown on Wall Street. Sales traffic inside the 29-story glass building began to slow down, and today about a third of the condos remain unsold.
That’s not too bad, actually. With over 65% sold, the developers should be able to finish this off, at some price and on some terms.
Faced with the prospect of empty units and static cash flow, just as sales were starting on an even larger sister tower — Two Northside Piers — the developer, Toll Brothers, decided to take a different approach and expand a program used elsewhere in the country that allows prospective owners to lease with the option to buy, using part of the rent toward the purchase.
A few months back, in September, I wrote about rent-to-own, and gave it a plug:
Shamelessly plugging good ideas since 2004
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:
Rent-to-own’s basic concept is fairly straightforward: you want to buy the condo, and I the owner want you to buy it. 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.
As you can imagine, no wonder it’s intriguing to developers of nearly-but-not-fully-sold condos:
Prospective buyers at Northside Piers tower are essentially able to try out certain one- to three-bedroom apartments. If they like what they see, they can purchase them later on. Or, once the lease is up, they can simply walk away.
Having paid rent, to be sure.
And because human beings don’t like moving, after you’ve settled in to a place, come to arrange your furniture, and come to know your neighborhood a little bit, the condo flat has become home, and you are predisposed to stay.
I really don’t want to move
“It’s really experimental, but all indications so far are good,” said
Von Spreckelsen likes what he’s seeing
Two’s not yet a trend, but better than zero.
Importantly, a well-designed rent-to-own program doesn’t cannibalize existing sales prospects; rather it gives them an easier entry into the property at a price point that doesn’t infuriate those who bought their owned condos before the rent-to-own program began.
The rent-to-own concept represents “a change in mind-set” during these tough economic times, said Jonathan J. Miller, a founder and the president of the Miller Samuel real estate appraisal firm. “The longer this drags out, the more acceptable this option becomes; this is just evolving,” he said.
Just renting this burrow, dreaming of owning it
Like desert frogs that can hibernate for years until a sudden rain, rent-to-own is seldom a developer’s preferred tenure, but appears only when it’s financially raining:
The last time lease-purchase options were seen with any frequency in the
Right – interest rate and inflation expectations both have a strong influence on the economics and desirability of rent-to-own.
A rain of frogs means it’s rent-to-own time
“That period of time was a very severe downturn,” Mr. Miller said. “The market had about seven years of surplus inventory to be absorbed. In the period we’re in now, we have 7.9 months of inventory. We’re clearly going into a weak economic period but going into it with relative strength.”
Lest the numeracy pass you by, in the late 1980s the overhang was 12x longer than the current one – years versus months.
Klara Madlin, the owner of Klara Madlin Real Estate in
How many of these lessees ultimately bought their apartments back then? “I would say maybe 5% — not a lot,” Ms. Madlin said, noting that hard numbers are difficult to come by. Conversion rates were low, she said, “because the people generally who were renting to buy couldn’t really afford to buy.”
That’s a risk to the owner/ landlord; you may be occupying the apartment with someone who will only move out. At the same time, you’re getting rent and keeping the building occupied (which people always prefer), so as long as the rent-to-own resident is presentable, you’ve gained instead of lost.
“I think it might be different this time around,” she said.
I think so too.
Renting to own can be attractive for both sides of a real estate transaction.
You look good to me – I look good to you?
It brings cash flow to properties that otherwise might be stagnant.
Check – it’s good for the owner.
Buyers lacking adequate down payments (perhaps because of stock losses), struggling with poor credit, or even recovering from a recent foreclosure, can build up savings and rebuild creditworthiness in order to get a mortgage.
Check – it’s good for the renter. As I wrote in September:
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.
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.
Even with its limitations, there are some households for whom rent-to-own makes eminent sense, if only as a means of building credit while living in a good place:
For Simon Hall, a 40-year-old technology specialist from
“Even though I have excellent credit in the
Over the summer, before the birth of their daughter,
From the New York Times: ONE DAY THIS MAY ALL BE OURS Baby India spurred Simon Hall and Vishma Victor to sign a lease option at
If they agree to buy before the lease expires, he said, their $4,000 monthly rent (minus maintenance costs) will go toward the purchase of the unit, which has a current asking price of around $980,000.
This approach – applying a portion of the rent to the purchase price – is clever in two ways.
That’s me, in two ways
1. It gives the buyers the sense that they are building equity, because each month’s rent lowers their purchase price by a set amount. Like the old Christmas Clubs, or in more modern times like frequent-flyer points (and other loyalty accumulators), it represents a running total of credit that has value only on a future purchase, creating a psychological lock-in
Michael D. Mancuso, 29, a salesman, and Danielle J. Gendler, 26, an events and marketing manager, were not necessarily concerned about their creditworthiness, but they wanted extra time to save up for a larger down payment. In October, they signed a similar lease-purchase agreement for two years on a one-bedroom at
“If we get most of the rent that we paid back, I’m pretty much living in
If Mr. Mancuso does buy, the condo developers will have sold their unit today, on a good sale that sticks, despite the lack of a down payment.
By his calculations, 83% of the $3,000 in monthly rent will go toward the purchase, which means the $550,000 apartment will cost them around $490,000.
MEANWHILE, SAVE Danielle J. Gendler and Michael D. Mancuso have a purchase option on a
Designing discounts-that-aren’t-discounts is one of the many little tricks real estate developers use in soft markets. Even though the real price is $490,000 two years hence, the market will perceive it as $550,000 now – that is, unless a blabbermouth blogger spills the beans.
What beans? Who’s spilling beans? I’m not spilling beans!
2. By tying the reductions to a stated current price, it helps the owner sustain the current pricing and discourages people from thinking about retrades. Psychologically, it anchors the pricing.
Going to set the pricing right about here
Now it’s time to meet another kind of rent-to-own participant:
Can you guess their state of mind?
[Continued tomorrow in Part 2.]
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