Rent-to-own arrangements might be in need of ameliorated reputations, but that doesn’t mean they aren’t quickly becoming practical solutions to attaining homeownership while also helping brokers fill their client pipelines.
Rent-to-owns traditionally attract people with extremely damaged credit who wouldn’t even qualify in the B-minus channel—but for whom credit rehabilitation is only a matter of three or four years.
They can also be lucrative for mortgage agents and brokers.
“As a broker, what makes it lucrative is that I find a solution for my realtor,” said David Goncalves, a mortgage agent and founder of Vine Group. “We’re not putting the client in any kind of private high-interest loan that they won’t be able to get out of, so it’s cost-effective for the consumer, and for us because we have a client in our pipeline we know will need a mortgage in two or three years when their savings plan has matured. We have a guaranteed long-term client.”
The caveat, though, is that the rent-to-own market is very niche—but, as Goncalves explains it, one still worth exploring.
“Clients who do rent-to-owns are sophisticated, so what they’re looking for is a broker who will understand the complex needs, and we tend to find there’s a lot of value in the knowledge and service we provide,” said Goncalves.
Rachel Oliver, managing partner of Clover Properties, a rent-to-own company, says this kind of ownership arrangement used to be volatile with what she pegged a 50% success rate. She attributes that to a few unscrupulous players, many of whom were simply people unable to offload their homes and desperate to pay the mortgage. But with a third party mediating the process, she calls it win-win.
Part of that involves keeping the homeowner-to-be realistic about what they can afford—Oliver says they all have a penchant for thinking they can afford more than they can—and then finding a mortgage agent to help determine the term of the arrangement. The average duration of rent-to-owns is three years.
“Once the homebuyer is comfortable with the parameters we recommend, and once they find a property, we bring in a private investor,” said Oliver. “We put together a contract between the homebuyer and the private investor to make sure everyone is protected in that rent-to-own situation. We coach the homebuyer for a three-year term to make sure they’re complying with their rent-to-own contract and maintaining good credit, and making sure they’re mortgage-ready. We’re priming the pump to make sure the mortgage agent gets that client at the end.”
Oliver says mortgage agents typically charge the buyer as much as 1%, and collect a referral fee from Clover.
“The three places agents can monetize a rent-to-own are charging the buyer, getting a referral fee from us, and converting that rent-to-own person at the end of the process into a mortgage client and do their renewals—it’s basically a lifetime value for them.”