In the aftermath of the housing market collapse and the Great Recession, markets have finally rebounded, but home ownership is lower than it’s been in nearly 50 years. Sale values have gone back up, but wages are stagnant, and most Americans are burdened with debt (making large down payments difficult for the average household). Compounding this issue is the fact that lenders are more skittish after the collapse and requirements for traditional home loans are much more strict than they used to be, leaving anyone with less than perfect credit in a pinch when it comes to pursuing home ownership.
Alternative methods of home financing have become much more popular as a direct result. As a recent Wall Street Journal feature reports, rent to own programs are only growing, and are a common path toward home ownership. Rent to Own properties, once prevalent in the 90s, fell out of vogue at the turn of the millennium due to much more lax lending that made it easier for most people to get home financing with little money down.
As we know far too well, such carefree lending played a significant role in the recession in the first place, and notorious firms like Goldman Sachs and Lehman Brothers became known to be at the center of it. Today, agencies like Home Partners of America and HomeLPC are among the fastest growing companies that provide rent to own services. They are also, however, run by former Goldman Sachs and Lehman Brothers bankers.
“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,” Says William Young, founder of Home Partners of America and former Goldman Sachs executive. For his part, young saw an untapped market for home ownership, and dove in to take advantage of an opportunity.
The trend toward Rent to Own services is not a new phenomena. What is are large firms and major companies putting themselves at the center of it. In the past, rent to own properties were offered individually by small scale mom and pop organizations or even individuals. Home Partners, on the other hand, invests millions and millions of dollars to utilize and profit all across the nation. In June alone, they spent $100 million to buy 320 homes across the US, up from $15 million for 66 homes during the same period last year.
Home Partners certainly has the financing and the marketing down (you’d be hard pressed to discover they were founded by a Goldman Sachs insider), but their business practices may remain a justified source of wariness.
An applicant of Home Partners must work with a realtor to find a home in one of many pre-determined communities. Unlike traditional rent to own programs where an individual selects from a preexisting rent to own property, Home Partners will then purchase that home directly. In theory, the applicant works on improving their credit while making rent payments and saving up for a down payment to purchase that home.
What sets Home Partners apart from other rent to own programs is is the fact that rental fees increase over time as well the sales price of the home. One of their listings in San Diego has a sales price of $449,975 and can be purchased at $472,035 after one year, for example. After five years, that goes up to $573,762 which is a 28% mark-up. Meanwhile, monthly rent would start at $2,810 then increase to $3,256 by the fifth year. By comparison, a typical home in the same area with an average 30 year mortgage would be around $1,800 monthly. Average rent for a single family home is $2,270 in San Diego.
Home Partners claim that the reason for the price hikes is to anticipate and accommodate for increasing property values. Home Partners tends to only acquire houses in good neighborhoods with quality school systems. Nevertheless, if the recession has taught us anything it’s that no home or neighborhood is truly immune from housing market volatility.
For financing that’s more flexible than what banks and credits are able to offer, rent to own companies can be a boon for first time buyers looking to enter the housing market. Home Partners of America can also be a decent choice; particularly if the buyer plans to purchase quickly. But for anyone feeling uneasy about living in a home owned by a company associated with Goldman Sachs, there are definitely other clear alternatives out there.