At a time when the cost of buying a home is escalating due to rising interest rates and a limited supply of houses on the market, potential buyers are looking for new ways to finance their home purchase.
Enter Rent-to-Own.
Imagine renting the home of your dreams, but in addition to getting a place to live, you build a down payment at the same time. The business model has been popular with mom-and-pop landlords for years, but now it’s spreading toward larger real-estate investment firms that will even purchase a home on your behalf—and then rent it back to you with a portion of your rent going toward a down payment.
David Dweck, a real-estate investor and landlord in Boca Raton, Fla., says that he structures his rent-to-own deals by matching the amount the tenant pays toward equity. So, for example, if the tenant pays an additional $100 over the rent each month, he’ll match it dollar-for-dollar so that by the end of two years, the tenant will have $4,800 to apply toward the purchase price of the house. If the tenant chooses not to buy, he can just walk away–but he’ll lose the money paid toward equity.
One new player in the industry is San Francisco-based Divvy Homes, which launched last year and offers its customers the flexibility of renting with the financial benefits of homeownership. The company, which operates only in Memphis, Cleveland and Atlanta right now, allows tenants to build equity as they rent. The tenant can select any home on the market, and Divvy will purchase that home and rent it back to them. The tenant typically puts down two percent of the purchase price, then pays a monthly amount that includes both rent and equity payments. The equity portion builds a down payment toward the purchase of the home, with the goal being to achieve 10 percent equity in the home over three years. At that time, the tenant can purchase the remainder of the home and apply that 10 percent toward the purchase price. Or, if the tenant decides to walk away after three years, they will receive 10 percent of the proceeds when Divvy sells the house, less a 1.5 percent payment to cover selling costs.
"Saving for a house takes time, and it takes a commitment," says Adena Hefets, Divvy’s co-founder and chief operating officer. "This is more or less a forced savings mechanism so you know for sure you’re going to have the down payment and you can buy us out."
If you’re interested in renting to own, be sure to do your due diligence. Bear in mind that depending on the structure of the transaction, if you decide not to purchase the home, you could lose the extra rent you paid toward equity. You could also lose out if the home drops in value during the lease term. And, the New York State Department of Financial Services warned in April that alternative home-purchase finance agreements, such as rent-to-own, could constitute unlicensed, predatory mortgage lending. Be sure to get the advice of a trusted advisor, such as a real estate attorney, before you proceed.