A toe in the ownership water: Part 2, the would-be sellers
[Continued from yesterday's Part 1.]
In our exploration of the infancy of twenty-first century rent-to-own, using this New York Times story as our text, we have up to now heard from the would-be buyers who intend to be homeowners – condo owners – one day, but are delaying for any of several good reasons:
My superego and id are fighting it out
They’re not convinced prices have bottomed. (Ms. Vegas and Mr. Zimberg)
They’re not confident of their mortgage credit. (Mr. Hall and Ms. Victor)
They haven’t got enough down payment. (Mr. Mancuso and Ms. Gendler)
Out of these anecdotes emerges a critical policy takeaway.
Two years ago, all of these people would have been buyers, fueled by high leverage loans, easy credit, and the prospect of every-rising prices. All three of these representative households are relatively young, relatively mobile, and with higher earnings ahead. They are ‘natural’ renters, at least at this moment in their life cycles, and at least for the time being, they’re contented renters. Ownership is something to which they aspire for financial reasons, not a necessity of their household or economic profile. Thus, our recent binge of cheap credit changed not only the amount of housing consumption (thinning out families and increasing the number of households), but also the tenure of housing consumption, turning ‘natural’ renters into premature owners.
Including, as premature owners, people who were owning not out of consumption but rather out of financial ambition, such as this fellow:
Jason Murdock, a 33-year-old part-time disc jockey and technology consultant, is hoping that [rent-to-own] will happen for him. During the height of the real estate market, he bought several investment properties — including two in
From the New York Times: TAKE SOME TIME Jason Murdock is exploring offering the rent-to-own option for properties he must sell. It is a way, he says, to get around the mortgage crunch
Mr. Murdoch is a wholly different case from the people we’ve met so far in the story. Not a would-be buyer, he’s a would-be seller – and on the verge of being a desperate one:
He already lost one home, in
The next time you hear about foreclosures, remember investors like Mr. Murdoch; not that we’re unsympathetic, but rather than his foreclosure hasn’t rendered him homeless or even reverted him to being a renter.
“I’ve had interest from people who wanted to purchase, but they couldn’t get a mortgage,” said Mr. Murdock, who recently moved to
I give Mr. Murdoch credit: rather than whining, he’s responsibly trying to find solutions to his plight:
Allowing would-be buyers to lease first and use an as-yet-undetermined amount of rent toward the purchase “gives the buyers time to save up,” he said. It also shows him that they are qualified to buy eventually.
Mr. Murdoch’s move is also a workout-survival strategy. It gives him rental income, which he can pay over to the banks holding his loans. On foreclosure, those leases will be canceled, and the bank will have the headache of renting and collecting rent, or of having a vacant property incurring costs (such as security and real estate taxes) and administrative overhead. By acting as a responsible landlord, he’s giving the bank (which left to its own devices can be a zombie landlord) multiple reasons to leave him in place. By creating an innovative tenure, he’s demonstrating that he’s doing a better job managing (for free!) than the bank could do by paying someone to manage for it.
Good for him – I hope he makes it.
Just stay ahead of the wave!
Brokers are even executing lease-purchase agreements in co-op buildings, though mostly, they say, as a last resort. (Most co-ops, however, restrict rentals.)
Another complication of living clubs: the other club members have no particular interest in helping the newcomer.
Karen Kelley, a broker at the Corcoran Group, said she had recently completed such a deal on a prewar three-bedroom on the
How can you execute a lease-purchase in a co-op, when the co-op board has to approve any new buyer? If the renter wants to become a buyer, somebody’s going to be upset.
Brokers say they believe that more people are qualified to buy than are actually buying; many may be sidelined because they are waiting for home prices to reach their nadir or for the credit markets to loosen up.
Unsafe at any price?
Psychology plays in to home-buying and home-selling, and psychology turns. To help turn it, there are always pro-transaction real estate brokers, who never yet met a time that couldn’t be presented as a buying opportunity:
“People really do want to buy — they look at
Isn’t ’sponsor unit’ a much nicer term than ‘unsold and empty’?
Mike Tong, the developer of the
As Secretary Paulson and the whole TARP team knows, push down the occupancy cost and you change the rational equation. Now all we have to do is change the psychological one. For that, Treasury has developers as volunteer allies:
In the meantime, Mr. Tong seems to be doing all he can to spur sales himself, even bringing in as a consultant a mortgage specialist, Debra Bock of Stanley Capital Mortgage, to counsel prospective buyers so that they can qualify for a loan. “About a third are having trouble,” Mr. Tong said. “But I would say that 100% of them would be able to buy in three to six months.”
Even with interest rates falling as spreads compress, most lenders have lowered their maximum loan-to-value ratios (resulting in increased down payment requirements), tightened up their income verification, and lowered their payments-to-income ratios as well. Some of those who qualified for loans two years ago will not qualify today, at least not unless they raise their income or their down payment.
Those leasing at Northside Piers in Williamsburg, as in other developments, must be prequalified by a mortgage company in order to buy a unit; prices range from $700,000 for a one-bedroom to $1.1 million for a three-bedroom.
That’s a tricky circularity: if you can rent only if you could buy, why aren’t you buying?
I can’t rent unless I can buy, but if I could buy, why would I rent?
Presumably, only because you’re not sure prices have stopped falling.
According to Mr. Von Spreckelsen, the Toll Brothers senior vice president, renters have six months to commit to buying if they expect to use all of their rent toward the purchase.
“After six months it trails off — they lose a month for each month they delay,” he said.
Even as they coax households into becoming renters, condo developers would rather then flip those households into being buyers. So they put a little pressure on, in the form of diminishing value in the accumulated rent credit.
Are you focused on your purchase options yet?
Will it work? That depends on the psychology, doesn’t it?
Jill Vegas, 37, an interior decorator and stager, and her husband, Michael Zimberg, 35, a director at BNP Paribas, a bank, have been mulling over that offer since their lease option at Northside Piers began in October.
The couple have been eager to get back into the
Ms. Vegas and Mr. Zimberg are players of the real estate game: they cashed in their chips at a very good time, and now they have liquidity.
Yet while they are not necessarily concerned about qualifying for a mortgage, they 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. But when I look down, I can count on every single block how many new developments are coming up and see thousands of new units, and that worries me.”
One of many individuals who make up the observant herd.
Is the market moving yet?
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