Rental homes are back with a Fintech facelift, but can they escape their sketchy past?

Jhe housing market is hot. House prices are soaring and rents are not far behind. So what if you need affordable housing? Especially if you have less than stellar credit or don’t have the money to outbid the competition?

One intriguing – but polarizing – option is the rent-to-own model.

Over the past few years, a group of startups have reinvigorated an old path to homeownership: the the lease option contract, sometimes called hire-purchase or purchase under contract. In the simplest terms, this type of agreement will allow you to rent a house and eventually buy it from your landlord.

“Part of your monthly payment is treated as rent, and then part of your monthly payment is treated as ongoing savings or a down payment for the house,” says Michelle Boyd, director of the Housing Lab at the Terner Center for Housing. Innovation at the University of California at Berkeley.

Proponents say the model makes home ownership possible for those who could not otherwise afford it. The time spent renting is intended to give the future buyer a chance to qualify for a mortgage by increasing their savings, improving their credit rating and paying off their debts.

Critics, on the other hand, say the model makes hopeful landlords beholden to business owners who often charge above-market rent. Crucially, there’s also no guarantee that you’ll be able to qualify for a mortgage at the end of your lease.

The history of rent-to-own houses

History is on the side of the detractors, but the people building and investing in these startups believe they are expanding ownership and providing a viable path for people who would otherwise be shut out of the market.

“I think people are understandably very skeptical of the rent-to-own model…given the history,” says Adena Hefets, CEO of Divvy Homes, a startup in this market. However, she sees companies like Divvy taking “historically non-consumer friendly industries and disrupting them” – which is how many now widely accepted fintechs began.

Lease-to-own agreements have been around for decades, and their previous iterations were notoriously predatory. Arrangements called land contracts “were used by landlords to steal wealth from people who couldn’t access traditional mortgages,” Boyd says, especially people of color and others who didn’t have access to the traditional financial system. .

Under land contracts, tenants who missed a single payment could be evicted and lose all the capital they had already invested in the house. Those who managed to make each payment on time were often forced to buy the house at a huge markup. By one estimate, the contract buying system cost black families in Chicago between $3 billion and $4 billion over the two decades beginning in the 1950s.

As recently as 2016, the Federal Trade Commission warned of scams surrounding rent-to-own agreements and advised consumers to avoid them. “Even with legitimate rent-to-own offers, the devil is in the details,” the agency wrote. “Consider saving your money and repairing your credit to buy a house later.”

How does rent-to-own work?

Now, a handful of startups are working to revamp the rent-to-own model — and its image. In addition to Divvy, companies like ZeroDown, Landis Technologies, Home Partners of America, and Verbhouse were founded around 2017 and 2018 (with the exception of Home Partners, which was founded in 2012) and are now gaining traction.

So far, these companies have avoided major controversy. After three years in business, Hefets says around half of Divvy’s clients are able to redeem their properties. A January article from FinancialTimes said Home Partners reported its own conversation rate was around 20%. (Money was unable to verify this figure.) Typically, these companies say they only approve tenants they deem have a path to mortgage approval.

Businesses are also attracting significant investment. Home Partners was recently acquired by private equity giant Blackstone for $6 billion, and venture capitalists valued Divvy at $2 billion last fall. Last summer, a group of investors including funds associated with Jay Z and actor Will Smith invested $165 million in Landis.

For consumers, the details vary with each platform, but the principles are the same across the board. You’ll sign with a company, get an approved budget, and choose a home that’s already on the market. Then the company will buy the house on your behalf.

Then you will rent the house for a fixed period, usually two or three years, but potentially up to four or five years. You may need to deposit a small amount to get started. A portion of your rent accumulates toward your down payment over the term of your lease. At the end of the lease, the idea is that you will be able to purchase the house from the business.

At this point, you will still need to qualify for a mortgage in the traditional way – and the company cannot guarantee that you will. (You can also buy the house sooner if you qualify for a mortgage sooner.) If you can’t get a mortgage, you can either walk away with your savings or some companies will allow you to extend your mortgage. lease.

Who is rent-to-own housing for?

These programs are for potential homeowners who might not otherwise be approved for a mortgage due to limited savings or issues such as bad credit, large student debt, or fluctuating income. Landis Technologies, for example, caters specifically to low-income buyers.

Hefets says Divvy customers tend to earn between $50,000 and $150,000 a year and have FICO scores between 630 and 650. The largest segment of Divvy customers are healthcare workers, she says, follow-up of educators and 1099 contract workers.

Healthcare workers often have a heavy burden of student debt, Hefets says, while educators often struggle to build a down payment — two challenges that make it difficult to qualify for a mortgage. Meanwhile, gig workers and the self-employed often struggle to get mortgages even if they make a lot of money, because lenders like to see consistency.

The benefits for these groups can be substantial: rent-to-own programs provide time to build a strong credit history in preparation for a mortgage. And because the savings are built into the monthly cost of rent, progressing to a down payment happens automatically.

Since renters typically set a purchase price as part of a lease, they can end up with homes that are worth significantly more than they were when they first started renting when the housing market is so hot. The schemes could also allow buyers to live in an area that is in higher demand than they otherwise could afford on their own.

What are the disadvantages of rent-to-own?

A lease option program, even from a buzzing start-up, can have downsides. There’s always a risk, Boyd says, that customers won’t own the property. It is possible that in today’s wild real estate market, the company cannot win the house you have chosen. (Although as all-cash buyers, companies have an advantage.) There’s also no guarantee that you’ll actually be approved for a mortgage at the end of your lease.

Boyd says potential rent-to-own customers should understand that using one of these programs is “not the same as buying your home.” Hefets agrees that rent-to-own programs aren’t for everyone. If you can get a mortgage the traditional way, she says, “that should always be your first choice.”

This is because most mortgages are federally guaranteed and subsidized. The sooner you fully own the home, the sooner you’ll start accumulating wealth and equity in ways you couldn’t if you were a renter. And with relatively low mortgage rates (at least historically), mortgages are “the cheapest debt you’ll ever have in your life,” says Hefets.

It’s also worth remembering that rent-to-own programs aren’t the only option for homebuyers who need help. Many states and counties offer homeownership programs that can help with everything from making a down payment and closing costs to getting competitive mortgage rates.

If you think a rent-to-own program might be a good fit for you, know that each company’s offer is a little different, which is why it’s so important to do your homework.

Make sure you know how much monthly payment you can afford. Also, make sure you understand the terms of the agreement: who will take care of the maintenance, repairs and improvements to the property? What happens if you miss a payment? How is the purchase price of the house calculated? Does the company have a good track record of converting tenants to owners?

“As with all things money,” Boyd says, a rent-to-own program “can be a good situation for one customer and a bad situation for another.”

Money movements

Every Saturday, Money’s real estate editor, Sam Sharf, dives deep into the world of real estate, providing a fresh take on the latest housing news for homeowners, buyers and dreamers.


More money :

“I can do it myself.” A new generation is breaking convention and changing the way America buys homes

How to buy your first home

Homeownership Program Guide

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