(Editor's Note: This select print feature originally appeared in the February 2017 issue of DS News.)
Delinquencies and foreclosures may have dropped to pre-crisis levels, but the mortgage debacle is far from over. Many mortgage lenders and servicers continue to sit on large numbers of real estate owned (REO) and foreclosed properties. Making matters worse, many of these homes are barely in marketable condition due to deferred maintenance and no updating, and they’re a blight on their surrounding community, dragging down neighboring property values and reducing property tax revenues.
Yet a ready market may exist for some of these homes. There are plenty of people who would be willing to take over the responsibility of rehabbing the properties and getting them back on their feet again, even as they’re living in them. There’s just one problem: they don’t have the money to buy the homes, mainly because their previous credit problems prevent them from securing a mortgage.
This state of affairs is especially frustrating for those people who lost their homes after the real estate market crash but have been able to rebuild their finances since then. They could save a lot of money each month by owning rather than renting, but they can’t afford to buy. Meanwhile, the homeownership rate sits at a nearly 48-year low of 63.5 percent.
Fortunately, an answer exists to solve both of these problems: rent-to-own housing.
Renting to Own
Rent-to-own housing gives underserved consumers a path to homeownership that they might not otherwise have, while providing immediate occupancy of homes by people who are willing and able to fix them up. Rent-to-own companies offer the occupant the opportunity to get the home back to where it is a functioning property again, one that’s contributing to the neighborhood and raising local home values. In the process, residents have a place to live and learn what it means to be a homeowner, such as making the necessary home repairs and maintenance, making timely payments, and improving their credit.
For lenders, rent-to-own companies offer a good outlet for their REO properties while creating a list of prospective future mortgage customers—people who have developed a track record of making timely lease payments while demonstrating their ability to handle the other responsibilities of owning a home, namely maintenance and repairs.
And it’s a big potential market. More than 11 million households spend at least half of their income on rent, which continues to soar. It could make more sense for them to own, if they only got the opportunity.
That’s where rent-to-own companies come in. Rent-to-own companies offer lenders a fair price for their properties—in cash—and close quickly, which is an attractive option for lenders and servicers that have been sitting on these nontraditional assets for some time with no plan or process to liquidate them. Rent-to-own companies buy bank-owned and distressed homes from all of the major banks and servicers, both one property at a time and in bulk. And they’re always looking for new inventory sources. At Vision Property Management, we may also flip the property to a local investor from our huge buyers list, but rent-to-own tends to be our predominant business.
A Trial in Homeownership
The ultimate goal is to put in occupants willing to do the work to get the house back to a marketable position, so it is a functioning property that’s contributing to the neighborhood and raising community values.
Many of these homes have critical maintenance issues that have to be dealt with before the tenant can move in, such as a new roof or HVAC system. That’s the property manager’s responsibility after purchasing the home, but when it comes to things such as carpeting, painting, or upgrading appliances or fixtures, that’s the responsibility of the occupants according to their personal tastes, just as if they owned the home outright.
And they certainly get the opportunity to do just that. For many, that’s their ultimate goal.
Rent-to-own lease agreements are typically seven years, but once the tenant has been paying on time for three to four years, the property manager may offer them the chance to purchase the home early. Some will even recommend a lender or prepare the tenant for maintaining and caring for their home.
One of the advantages of the lease-to-own option for potential homeowners is that they do not have to be subjected to a deep dive into their credit history in order to sign a lease, though they do have to have a stable job and income. There are no fees to apply, and the entire process can be done online. It’s crucial the process be as simple as possible for the consumer, as this puts them at ease about the transaction.
Finding and Preparing the Tenant
There are a number of ways to find rent-to-own tenants, like lawn signs and other forms of physical advertising, but listing properties on major auction websites like Trulia, Zillow, and Auction.com are often the most successful. These sites also allow renters to arrange tours and apply online.
Once a tenant is interested, it’s important to incentivize them through their rental agreement. Give them credits each month, so they can build potential equity in the home. For example, the tenant might earn $50 of each $500 monthly payment that goes toward a balance that is owed. After three or four years, if the tenant is interested in purchasing the property and can qualify for a mortgage, the two parties can then negotiate a mutually acceptable sales price and draw up a purchase agreement.
It’s important that after the lease agreement is signed that tenants are not left alone. Each renter should be assigned a customer service advocate who will be responsible for working with them to make sure their payments are submitted each month. In the event the customer runs into a problem and they can’t makex their payment, they know who they can call.
Eviction is never a good option for anyone—including the property manager—so the goal should be to help the tenant stay in their home, even if they run into problems. Though legally, you may be allowed by contract to start the eviction process after 30 days, consider extending beyond that and have an attorney try to reach a resolution with the tenant.
Understanding each tenant’s unique life situation is important with rent-to-own arrangements. Many rent-to-own consumers are habitual renters who want homeownership but have struggled to achieve it. As long as the tenant is willing to work, property managers should take any steps they can to keep them in the home.
This type of approach is typically successful for both parties. Vacant homes remain occupied and get restored, and the tenant gets real-life experience in homeownership, as well as equity in the property. Additionally, improving the property helps prospective homeowners, lenders, and the community at large.
And that’s the overall goal. By turning renters into homeowners, we can restore America’s neighborhoods and fight community blight.