Unsure about where he wants to put down roots, Aronn Solis visited 35 possible homes before finding the answer to his housing needs with a rent-to-buy condominium at Clocktower Pointe in Countryside.
For $2,000 a month, half of it credited toward a down payment should he decide to buy the $400,000 unit in the next 18 months, Solis is living with his girlfriend, Nicolle Heydorn, in a 2,000-square-foot, two-bedroom, two-bath home with a roomy outdoor balcony.
“I wanted nice. I wanted new. I wanted clean,” said the 25-year-old professional poker player who grew up in La Grange and Hinsdale.
On a national basis, Solis is part of a growing pool, said John McIlwain, senior resident fellow at the Urban Land Institute, a nonprofit education and research organization. Rent-to-buy “is definitely growing,” said McIlwain.
“A number of sellers, particularly developers, are turning to that” to fill unsold and unoccupied units in the slow home market, he said.
Rent-to-own traditionally has been used by buyers with limited means to purchase a home. But the collapse in U.S. housing sales in recent years has produced a new rent-to-buy iteration, McIlwain said. Sellers of higher-priced homes and resort properties are willing to woo skittish buyers with rent-to-buy programs to provide cash flow now and, hopefully, lock in future buyers.
The Washington, D.C.-based McIlwain said he has seen little expansion of rent-to-buy in his home market, but he cited several high-profile developments in New York that have or are offering programs. He noted that rent-to-own also is showing up in markets where housing-boom construction far outpaced recent sales, such as Miami.
The rent-to-buy phenomenon has been less evident in Chicago, but there are a handful of programs, each somewhat different, among new developments. In addition, there is anecdotal evidence of a growing interest in such deals by motivated sellers and frustrated buyers in the sluggish single-family home market.
“People have to move, and right now lending is restrictive,” said Valerie Witt, realty agent with Re/Max Team 2000 in Orland Park. “People have to have large down payments unless they can get a FHA financing, so it is putting people into the rental frame of mind.”
In a traditional rent-to-buy or rent-to-own transaction, the tenant/buyer buys the right to purchase a home for a given price at a later date. A portion of the rent is applied toward that price. If at the end of the rental period the buyer opts to walk away from the deal or does not qualify for a home loan, the seller keeps what has been paid.
The tactic appeals to sellers in a market with unpredictable pricing. But it also allows the tenant/buyer to test drive a neighborhood, school system and a property without making a long-term commitment. If prices dip below the agreed-upon price, the buyer is free to walk away to find a better deal.
The arrangement can allow a buyer with good credit and steady income, but not enough money for a down payment, additional time to accrue the funds needed to swing the deal. It also can give someone with a steady income but blemished credit time to clear up some problems before applying for a loan.
But what appears a simple win-win for buyer and seller is often more complicated, so both must do their homework, say sales agents.
“It can’t work for every seller,” warned Witt. “The trickiest part is finding the right seller for such deals.”
Most sellers need the equity from a property to cover the cost of a new home, Witt points out. Most of those who can and are willing to hold a property want enough rent to cover mortgage and maintenance costs, a difficult hurdle in the current market where there are rentals aplenty.
“The seller cannot cover the basic cost of the home or unit in today’s saturated rental market,” said Jeanine McShea, president of brokerage services for @Properties. Furthermore, McShea said, the new, tighter lending environment means lenders look askance at such deals.
Chris Herndon is co-founder of Palo Alto, Calif.-based Realty Nation, which operates the Web site RentToOwn.org. He believes rent-to-own can be a win-win arrangement when properly structured.
“It can jump-start the American Dream for individuals with insufficient credit or savings to qualify for a conventional loan,” said Herndon. However, he noted it is critical for buyers/tenants to understand what they’re getting into and to beware of scammers and opportunistic landlords.
Herndon encountered the concept as an amateur Chicago real estate investor and co-founded the Web site to provide informative content on the concept with a nationwide affordable-home search.
He said tenant/buyers often lose money by paying higher rent than in a traditional apartment and forfeiting any upfront deposit if, for some reason, the deal is not completed.
Less than 10 percent of the traditional limited-income tenant-buyer market actually end up with the property, said Herndon. Most tenant-buyers are renting because they cannot qualify for conventional financing, he said. Most are overly optimistic about solving credit problems, he added.
The new, higher-priced rent-to-buy condos and homes are only a sliver of the market, Herndon pointed out, so it is unclear whether a bigger percentage of those tenant-buyers will become owners.
Ron Rydin, sales director for Clocktower Pointe, thinks yes.
Rydin said the five-story, 18-unit Countryside building was designed with high-end buyers in mind. The sizable condos attract not only first-time buyers such as Solis but also midlife couples and seniors who may be downsizing from large suburban homes. But they still have solid resources and want to live comfortably, Rydin said.
Alan Lev, president of Belgravia Group, said his organization tried rent-to-own but discontinued it several months ago.
“We got some (sales) done, but it doesn’t compare to the sales and traffic of adjusting the prices,” he said.
In contrast, Magellan Development Group has offered a RentBuy program since 2005 at its massive Lakeshore East project near the confluence of the Chicago River and Lake Michigan.
The program is part of a strategy to woo people to try a new community and, if they like it, to put down roots.
“It was a great opportunity to encourage people to try out the neighborhood,” said Robin Berger, Magellan chief marketing officer.
Since the company builds both apartments and condominiums, the program allows those who have been renting at least six months in a Lake Shore East property to credit 25 percent of the rent for up to 2.5 percent of the purchase price of a for-sale home in the same development. Between 40 and 50 renters have bought homes as a result of RentBuy, said Berger.
Among them is Kristin Stocke, 36, who in January moved from an apartment at the Shoreham into a one-bedroom condo at the distinctive Aqua.
Stocke, an actuary who walks to work, had been renting at Lakeshore East since 2007 while trying to sell a suburban condominium. She sold the condo and decided to buy at Aqua, which she watched being built. She likes the location and the emerging Lakeshore East neighborhood and wanted to buy in a building she knew “was 95 percent sold.” The RentBuy plan meant she got $12,000 credit toward the $462,000 price of her new 68th-floor home.
“I did a lot of homework online. I know there are deals,” she said. “But there are bad units, and I’ve heard about foreclosures, and I didn’t want be part of that.”
