Rent-to-own deals aim to open doors for those shut out
A recently formed real estate company based in New York has launched a rent-to-own housing program in Houston that it says will help consumers who have been shut out of the mortgage market.
The program is designed for people with credit problems, those who are self-employed or first-time buyers with little credit history, said Ray Mikulich, CEO of HomeLPC.
The process works like this: When a would-be buyer identifies a house for sale, HomeLPC buys the property, makes minor improvements if needed and leases it to the consumer for three years. The idea is that the consumers will be able to improve their financial situations within that time.
The rent is based on similar properties in the market and is fixed for the term of the lease. As part of the deal, the renter purchases an option to buy the house anytime after the first year and before the lease expires. The amount of the option ranges from 5 to 10 percent of the home’s value.
If the renter decides to buy the house, the purchase price would be the original price HomeLPC paid, plus closing costs and any capital improvements that were made. If the value of the home has increased, the renter has to pay only 50 percent of that appreciation. The renter’s option and security deposit on the lease are credited to the purchase price.
If the renter has to move or decides not to buy the house, the option can be sold to a third party. The seller would then get the difference between the option price and the sales price of the home.
Katy residents Chris and
“There are just so many of those buyers out there that are close to being able to get a home loan, but the banks have made it extremely tough since 2008.”
Michael Seago
Danette Swilling were the first in the area to use the program, which launched quietly last year.
The couple wanted a larger home for their blended family of nine, but a credit issue prevented them from buying the house they wanted.
Their real estate agent, Michael Seago, had heard about the program and he worked with the Swillings and Home LPC to close on the house.
Seago said he often runs into folks who could make down payments but can’t get mortgage financing because of a tighter lending environment.
“There are just so many of those buyers out there that are close to being able to get a home loan, but the banks have made it extremely tough since 2008,” he said.
Still, there are risks associated with the program.
If the value of the house has gone down, the renter could be stuck overpaying for the house if he or she can’t negotiate a better deal with Home LPC. The renter could also walk away and forfeit the deposit and option money.
Participants must meet certain qualifications.
The home must be their primary residence, they must be able to demonstrate that their credit problems were temporary and they must show they have the ability to pay rent.
This type of program offers a compelling option for consumers that’s less risky than borrowing in the subprime market, said housing consultant David Jarvis of research firm Metrostudy.
“I definitely think there’s a place for that in the marketplace,” he said.
Mikulich, the CEO of Home LPC who has a long history in real estate finance, said the company has private equity and institutional funding to initially buy about 60 homes in Houston. The company will target homes priced from $150,000 to $400,000.
He said there are other companies that offer similar programs in other states.