The rent-to-own a home concept is making a rapid comeback as Wall Street financial firms look to capitalize on the growing number of consumers who's credit scores are too low to secure a mortgage.
The Wall Street Journal says that while rent-to-own programs were popular in the 1990s, they largely faded away in the 2000s, when lenders lowered the bar so much that almost anyone could purchase a home with a no or a minimal deposit.
Such programs are helpful to all parties, says the WSJ. Investors get to profit on the recovering housing market, while consumers get a chance to secure a home without needing to save for the down payment first. But the disadvantage for consumers is they'll face higher rents in the interim, as well as a higher purchase price.
Home Partners of America is one such company that's doing a great trade in the rent-to-own niche right now. The company's founder, William Young, said he saw a big market opportunity for anyone who could help the thousands of consumers who're currently locked 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," Mr. Young told the WSJ. He says his company spent $100 million to buy about 320 homes in June, up from $15 million, or 66 homes, in June of last year.
For Home Partners the opportunity really is huge. The company works by parnering with real estate agents to buy homes in approved communities for between $100,000 and $725,000. Once the home has been purchased, Home Partners leases it to a consumer, who obtains the right to purchase it from the company within five years. During that five year period, consumers have to work hard to repair their credit rating so they can secure a mortage and save for a down payment.
But while it gives consumers a way onto the property ladder, it does come at a cost. The WSJ notes they'll usually pay a premium over normal renting or buying a home in the traditional way. On the upside though, Home Partners insists that it's homes are generally located in nicer neighborhoods than most single-family homes on the market. The company also guarantees the sale price of the home when the rental contract begins, so consumers won't be caught out if home prices in the area escalate in the interim.
"All things equal this could be a really great opportunity for consumers, " said Sarah Edelman, a senior policy analyst at the Center for American Progress, referring to the cost of Home Partners program versus the rest of the market. "But all things need to be equal."