Investors Bank on Rent-to-Own Comeback
July 29, 2015
Rent-to-own programs are making a comeback as consumers with less-than-perfect credit seek to qualify for mortgages to get back onto the path to home ownership. Wall Street firms are increasingly offering the option to some consumers, allowing them to rent the home first with the option to buy it later.
Bringing Credit-Damaged People Home
Rent-to-own programs were popular during the 1990s but then faded as lenders had loosened up their underwriting and allowed more borrowers to qualify for a mortgage. But now with credit tightening in recent years, rent-to-own programs are making a comeback, The Wall Street Journal reports.
Some investors are finding it a win-win. They can get consumers to pay a higher rent in the interim and a higher purchase price the longer they wait to move from renting to owning.
Officials at Home Partners of America, among one of the fastest growing rent-to-own companies, say they saw an untapped market helping people who are being shut out of the housing market.
“What really frustrates me personally is that a lot of people I grew up with, extended family members, would have trouble getting access to mortgage credit today,” says the company’s founder William Young. The company, which operates in 30 metro areas within 15 states, spent $100 million to buy about 320 homes in June — a significant increase from $15 million, for 66 homes, a year ago.
In Home Partners’ program, a consumer works with a real estate agent to select one of the company’s approved communities (with homes priced between $100,000 to about $725,000). The company is teaming up with several real estate franchises, such as Realogy Holdings Corp. and Berkshire Hathaway Home Services. Home Partners then purchases the home and leases it to the consumer, as well as giving the consumer the right to purchase the home from Home Partners within five years. During the rental phase, consumers work on repairing their credit and saving for a down payment. The longer they rent, however, the more they’ll pay in the end to purchase the house. Consumers can also opt out of purchasing the home if it becomes too expensive for them.
Source: “Rent-to-Own Homes Make a Comeback,” The Wall Street Journal (July 28, 2015) [Log-in required.]
Updated: February 21, 2020