So, You Think You Can’t Afford a Home?

So, You Think You Can’t Afford a Home?
Photo by HiveBoxx / Unsplash

Priced out of homeownership but tired of renting? The rent-to-buy hybrid is getting a new lease on life.

Had a look at housing prices lately? Yes, we’ve seen the news headlines announcing a drop in housing prices, but they’re still historically high: on average $348,079 in the US at the beginning of 2022, an increase of 88% in the last decade,125% from two decades ago.

The pandemic appears to be responsible for the recent increases as “work from home” took hold and people started relocating. Supply chain problems made building materials difficult and expensive to obtain, while construction workers were quarantined along with the rest of the global work force.

Steep price rises

Higher demand and lower supply pushed prices up 12% between 2020 and 2021, and another 15% between 2021 and 2022. By comparison, since recouping from the housing crash of 2008-2009, prices had been inching up between 3-5% a year.

And if higher prices don’t faze you, the cost of a mortgage probably will, since raising interest rates is the favored monetary fix of central banks like the Federal Reserve to fight inflation, which you may have noticed is hovering around 8%.

This scenario is particularly bad news for first-time home buyers, particularly young ones who may lack savings and credit history. But it’s tough across the board: buyers can’t get their hands on enough money and sellers can’t get their hands on enough buyers.

If you have cash, don’t need a mortgage, and aren’t scared off by high prices, no problem. if not, “rent-to-buy’ may be the answer.

What it is, how it works

Rent-to-own (sometimes called “lease purchase”) is a hybrid approach to buying a home. It’s an agreement in which you commit to renting a property for a specific period of time, with the objective of buying it when or before the lease runs out.

Basically, the potential buyer is building equity while he or she is paying rent without taking out a mortgage or coming up with a down payment. It can prove beneficial to those whose credit scores could be higher, or whose savings don’t add up to a down payment. Rent-to-buy can also be a useful tool if you need or want an address in a consistently expensive urban center or suburb.

These agreements have two parts: a standard lease agreement and an option to buy the property. You pay rent throughout the lease, and a portion of the rent may be applied towards the purchase price. In some cases, you may pay a monthly fee in addition to the rent for your option to purchase.

A global phenomenon

As the housing crunch and escalating prices are not restricted to the US, it should come as no surprise that rent-to-buy is becoming popular in other countries where potential homeowners do not fall into the typical buyer profile. France is one of the countries venturing into this new market as it confronts a work force that no longer strictly fits the traditional lending criteria of lifetime contract, money in the bank, three-year credit history and at least 20% of the deposit price in cash.

Nantes-based start-up Sezame (“Sesame” as in ”open sesame”) targets the burgeoning market of self-employed independent workers and those moving or returning to France after working abroad who have means but not the classic bank lending profile.

Basically, after ensuring the potential buyer and the property are in good shape, Sezame buys the property and leases it to the prospective buyer for three years, after which time the renter agrees to buy the home. Payments and payoff are on a schedule, like a car loan., and 10% of the rental amount goes towards buying the property. Sezame also plays a role in securing funding for the renter when it comes time to actually buy the residence.

What could go wrong?

As you might imagine, rent-to-own is taking off fueled in no small part by a handful of start-ups. San Francisco-based Divvy Homes, for example, is already valued by investors at over $2 Billion and appears to be on track to book more than $100 Billion in revenue this year according to Fast Company, which paints a cautionary tale about the rent-to-buy phenomenon and points up the need for more transparency in the sector.

One concern in this regard is the increasing role played by venture capital and private equity in the housing market. A report by the non-profit Tech Equity group calls for greater accountability for these privately funded start-ups, and advocates that they “commit to public transparency on homebuyer conversion rates, typical contract terms, and monthly payment increases.”

Check list

Transparency is key for buyers as they perform due diligence before signing on the dotted line, so don’t be afraid to ask questions.

Don’t stint on research: the property, the landlord, the agreement itself; another reason why transparency is important.

Buyers and sellers must be clear on terms: some agreements give you the option to buy at the end of the lease; others obligate you to buy the property at the end of the agreement.

It’s important to agree on the purchase price regardless of whether you have an option or an obligation to buy. Another consideration to clarify: who will be responsible for repairs during a rent-to-buy agreement?

As interesting and enticing the prospect of getting around today’s hurdles to home ownership may sound, remember rent-to-buy is still a legal agreement. It is not something to try on your own. It’s a hybrid with lots of variables. Buyer or seller advice: consult real estate experts before signing anything.