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article imageAre Rent-to-Own home programs here for the long run?

By Jared Diamond     Jul 18, 2012 in Business
Rent-to-own home programs; the phenom emerged onto the scene roughly a decade ago. The question is: Are these programs a bubble trend or have they become a mainstay?
The current housing market is doing no one any favors. Owners are watching the value of their property being sent to basement figures, but employment market and static wages are keeping prospective buyers away. This has all resulted in a desperate search for alternatives that will allow an owner to eventually sell the house and another person the chance to eventually buy it.
Rent to own leases were once used to purchase vacation homes. It's a very basic arrangement: the renter pays for the option to buy the house, and then pays a monthly rent which includes a little extra to be credited towards the down payment. The landlord agrees to continue the necessary maintenance and is obligated to sell the house to the renter at a fixed price. The rent to own lease was never a big player in the housing market, but is starting to be used more frequently. The question is will this type of arrangement last once the housing market corrects itself. Are rent to own home programs here to stay?
A major clue lies in the investment community. If there are people willing to put up serious cash in real estate investment trusts (REITs) to finance the construction and operation of rent to own units, then this type of lease is not just a flash in the pan. The media is starting to report on a trend towards REITs based on rent to own, with USA Today reporting that one major real estate investment fund is considering major purchases of homes and will employ the rent to own strategy. Several major markets, including Phoenix and Las Vegas, are receiving special attention due to their long history of strong rental demand.
Marc Holland serves as VP of Operations at the national rent-to-own homes database, Home Star Search. He's noticed the trend as well. "I'd have to say that the current recession necessitated a further supply of rent-to-own homes. We've seen this not only in depressed markets, but in virtually all markets. Bearing this in mind, I don't think the demand (for rent-to-own homes) will end with the recession."
This is all pretty heady stuff for both landlords and renters. The rent to own strategy allows a person to sell a house in a depressed market while letting another have a chance to buy a home.
This can be a win-win arrangement, but rent to own is not something to dash into. There are a few risks involved. The landlord has to honor the option to buy and may be selling at a price that is lower than the market. The renter has to put up capital for the buy option and may lose everything if the landlord forecloses on the mortgage. Both have to agree on who will do the maintenance, and the renter must understand that a late payment can have a negative impact on his or her option rights. Still, this type of lease does create an opportunity in an uncertain housing market. A renter who has a poor credit rating can easily use the time to reestablish strong financial credentials, so that when the option is exercised a good housing loan can be secured. No one knows when the housing industry will finally bounce back and the landlord has to consider that housing prices may go even further down the hill. Rent to own can be the real estate equivalent of a protective put option: it protects the owner from even greater reductions in the selling price of a house.
No one can predict the future accurately, but it's safe to say that the housing market is going to be very slow in the short term. Rent to own is starting to get noticed by investors in this portends a lasting presence of this type of lease. There will be a few odds and ends to be ironed out, but there's no reason to think that rent to own is going to go back to being a niche in real estate financing. Indeed, this may soon rival the traditional mortgage as a way of paying for a home.
More about rent to own homes, Real estate, Personal finance
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