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October 9, 2008

Rent-to-Own on the Rise

rent-to-own-1008.jpg
Can't scrape together a down payment? Now your monthly rent checks can go toward one, writes our own Gabby Warshawer in The Real Deal this month. The model is called rent-to-own, and a few Williamsburg buildings, including the Decora and the Toll Bros.' Northside Piers, are offering it, along with Fort Greene's Forté. Gotta make up your mind fast if you want to stay, though. "The fine print on an advertisement for a rent-to-own unit at Northside Piers noted that 100 percent of the rent will go to closing costs if the tenant commits to buying the unit within six months, while 50 percent of the rent will go to toward closing costs if he or she decides to buy six to nine months after a lease is signed."
Buying a Condo, One Piece at a Time [The Real Deal]
Photo by TheTruthAbout.




Posted by lisa at 9:38 AM | Comments (14)
Categories: Market

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Question for the finance folks out there: Isn't this a pretty cheap call option. Let's say you're looking at a $1 million apartment that you could rent for $5,000. The only real cost to you of buying the option is the difference between the $5,000 and your current rent, which let's assume is $3,000. So over six months, you're paying $12,000 for the option to buy the $1 million apartment, which is about 1%. Of course, if you don't think there will be any volatility on the upside then I guess it's just flushing $12,000 down the toilet.

Posted by: lowintheheights at October 9, 2008 10:06 AM

Desperation so UNsexy.

Posted by: SnarkSlope at October 9, 2008 10:23 AM

You could look at like an option, but its more like a free option. For one, who's to say that the rent would be any higher than your current rent; for a comparable apartment, theoretically the rent should be the same. And two, if you excercise the option, you've basically lived for free for 6 months because all rent gets credited to closing.

In short, this is a great deal for potential buyers

Posted by: upandup at October 9, 2008 10:36 AM

not sure what rights go along with a typical call option. but in this situation, from an economics perspective, to calculate the true costs and benefits you'd also have to consider the value of being able to test out your investment (by living in it), and the difference in intrinsic value to you (if any) between the new place and the place you'd be renting for $3000. these things might not add up to a ton, but they probably balance out some of that $12K.

Posted by: i disagree at October 9, 2008 10:37 AM

Before they were handing homes to buyers with 100% financing, and all of the other perks that helped to screw up the system, there used to be rent with an option to buy. I did that for about a year in my house because my initial financing did not come through, as I got laid off right before closing. I think if you know you are serious about buying the house or apartment, it's a good thing. You are in the place, on layaway, if you will. If you change your mind, it's like paying rent in a regular rental. You walk away with no more or less than any other rental. I would think we'll be seeing more of this in the near future. It would seem to be a win-win for both buyers and sellers.

Posted by: Montrose Morris at October 9, 2008 10:50 AM

This seems to explain rent-to-own pretty clearly (I didn't quite understand the concept)

http://money.howstuffworks.com/personal-finance/real-estate/rent-to-own-homes.htm

Posted by: tybur6 at October 9, 2008 10:56 AM

Whether the option is cheap depends on the transaction costs of buying the option, e.g. moving, and the probability that it will expire in the money, i.e. that you can afford to and want to close.

Posted by: jawbreaker at October 9, 2008 11:12 AM

"along with Fort Greene's Forté"

I knew the lack of lights turned on at night spelled trouble. Rents are about to take a nosedive.

Asking sale prices mean nothing right now. The lowball rules the day. Rents will suffer a similar fate.

Posted by: DOW8000SP800 at October 9, 2008 11:30 AM

I doubt 'rent to buy' is a great option in the current market (because I believe purchase prices are going down so much that you wouldn't want to exercise your option when the time came), but one nice thing about it is if you don't know the building/neighborhood real well it gives you a lower risk chance to really know the place before committing to a full purchase.

Probably the single biggest mistake one could make is purchasing property and later realizing that the building or neighborhood is not really a place you are happy living in.

Posted by: northsloperenter at October 9, 2008 12:06 PM

I'm not a "finance person" but my gut reaction is that this is the equivalent of buying a flat screen TV from Rent-A-Center. That in the end you overpaid for something you could have just saved up for.

Am I missing something with the math? I'm not being facetious, I really want to understand the benefit.

Posted by: TownhouseLady at October 9, 2008 12:12 PM

nsr, i bet that's particularly useful with these new condos, given that it seems the standards of construction are so variable. and "fringe" neighborhoods, too, or even a neighborhood like williamsburg, which isn't fringe but could easily turn out to be a poor fit.

Posted by: i disagree at October 9, 2008 12:12 PM

"Am I missing something with the math? I'm not being facetious, I really want to understand the benefit."

Possible benefits are:

1. You really really love the place but don't have the money to buy right now but will in 6 months, so you get the place off the market and get to live there while you wait to get your finances in order.

2. The terms of the deal could be financially beneficial (e.g., the cost of renting somewhere else for 6 months and then buying the place might be more expensive than the lease-to-own deal). This has to be assessed case-by-case, of course.

3. If you think prices are going to go up in the next 6 months but don't want to commit to a purchase now, you could lock the place in at today's price and not have to worry about getting priced out (less of a worry now than it was the last few years, I think).

4. Like I mentioned in the other post, there is a chance to live there for a few months and getting to know the place before committing to a full purchase but still maintaining the option to purchase if you like it.

The deal can also be bad for the purchaser and, as you say, they could end up spending more money than if they'd just waited to save up and bought it outright, but there is no reason why it *has* to be bad.

The fact that you see more of these deals now, in what is increasingly a buyer's market, should tell you that sellers would rather not sell this way.

Posted by: northsloperenter at October 9, 2008 1:57 PM

Thanks NSR. All good points.

Posted by: TownhouseLady at October 9, 2008 2:26 PM

Where can I find apartments with the option to purchase wile renting???????
People are talking but no realtors are getting back to me??

Thanks!

Posted by: karo25 at October 22, 2008 2:07 PM

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