Atlanta Property Manager Discussed Lease Options and Rent to Own
A lot of owners are anxious in today’s economy to find ways to attract tenants in their rental property. Historically, tenants wanted and expected to rent homes with an option to purchase. I have fielded a lot of calls recently from owners who want to implement that strategy. However, I have to share with them that the market has significantly changed in 2009 and the strategies that worked in earlier years are not viable in today’s market.
It is no surprise that there are a lot of homes that are upside down with the mortgage being more than the house is worth. Underwater mortgages as they are called are becoming increasingly more common.
Real estate research firm Zillow says that 23% of mortgages are now underwater. This number could easily increase to 30% a year from now. One of the major reasons for the trouble is that home values fell 12.1% Nationally year-over-year in Q2, resulting in a total 22.3% drop in value since the market peaked in mid-2006. Of course regional figures will very quite a bit, but in Atlanta, I would say those numbers are fairly accurate. Twenty-two percent of all transactions in June were foreclosures. This is an indication that people are not willing to fight to save their houses.
So what does this have to do with renting my house via lease option? Well, a lot. The whole premise of the rent to own or lease option strategy was to get top dollar for your home because you were taking advantage of someone with less than perfect credit and providing them a guarantee to purchase the home with set price of the home. This allowed for market appreciation to provide some built in equity for the tenant and worked well for all parties.
Since the market today is not appreciating, but rather depreciating, there is no built in equity for the tenant. Tenants are afraid to get locked into buying a home when in fact the home may be worth less in the future and not more. They are also more concerned about their employment stability as well as paying a fee with no guarantee that the owner won’t go into foreclosure and walk away with their option money and then they can’t recover the loss.
Another issue is credit requirements are changing rapidly. As of January 2010, FHA credit requirements will be raised to a minimum 693 FICO score. This will eliminate a lot of the potential borrower’s ability to qualify. So even if you could find a willing tenant, their odds of qualifying will be significantly reduced.
From the owner’s perspective, unless you have had the house more than 8 years, more than likely, the house value may be less than the mortgage currently on the house. So how can the lease with option strategy work unless the owner wants to take a significant loss? Taking a loss really doesn’t make sense if it can be in rental service which should be covering the payment at least and hopefully providing some cash flow.
To further complicate the matters, currently it is near impossible to determine the future value of a home. The market is way too volatile. If you had a tenant who was willing to proceed and pay for the option to purchase, determining the future price of the home would be a challenge. There would need to be some additional language that stated that the owner would sell for 5% below appraised value in order to provide enough incentive for the tenant to move forward.
So at this time, Solid Source Property Management, is not recommending to proceed with this type of arrangement as it isn’t serving either party. We are sharing with both that once there has been a successful lease term, we believe that the owner would consider an incentive for buying the property, but we would have to evaluate payment history, credit, and the market at that time. We feel that this is the better solution for this volatile market.
November 5th, 2009 at 7:21 pm
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