Lease Purchase Agreements – History and Promise
More than seven years have passed since the housing crisis, yet access to available credit remains restricted, particularly for low-income people. But homeownership is still a goal for many, and communities are looking for safe (non-exorbitant interest rates or lump payments, etc.), alternative financing options that support and promote this dream for their residents.
One classic alternative is the lease-purchase agreement. With this arrangement, renters pay an upfront fee or premium on their monthly rental payments, which gives them the option to purchase the home at some future point. The purchase price is usually negotiated early on between the two parties.
But as a non-traditional funding instrument, how do banks, community development financial institutions, wealth-building non-profits, or other vested parties craft lease-purchase arrangements that carry as little risk as possible for the vulnerable populations taking advantage of them?
To address these concerns, the Center for American Progress (CAP) recently examined the history, benefits and challenges of this model. Findings are presented in a report brief entitled: Lease Purchase Failed Before – Can it Work Now?
As the title of this report suggests, while some of these agreements have helped borrowers become homeowners without compromising their fiscal integrity, the model is not an unequivocal success. Some lending companies have prioritized profits over financial health, while other mission-driven service providers - who consciously set-out to create risk-free products - have been derailed by challenging market realities.
But the report also argues that if the agreement is carefully crafted, it could be an opportunity for both owners and renters. Owners could avoid spending money on marketing when they get ready to sell, and renters could get on the path to homeownership without having the credit required for traditional financing. They could also lock-in a more forgiving price that creates additional equity for the renter long-term.
By analyzing promising programs and pilots coming out of places like Home Partners, The Cleveland Housing Network, The National Community Stabilization Trust, and others (which the report details), CAP was also able to propose a series of recommendations they believe will make the model more successful.
These suggestions include:
- Make sure the price negotiated between the parties realistically aligns with a renter’s ability to pay in the present and down the road
- Make sure renters are allowed to inspect the home for soundness and value – just like a potential homebuyer - before locking themselves into an agreement
- Try to avoid passing along basic maintenance fees to the renter during the contract period, if possible
- Offer homebuyer counseling before renters enter into a contract
- To help build a renter’s credit, landlords should consider reporting on-time rental payments to credit agencies
Do you think lease-purchase agreements are a viable way for renters with little or no credit to become homeowners? Do you think CAP’s recommendations strengthen the model?