Washington, D.C. — Although homeownership rates stand at their lowest point in two decades, studies show that many renters still aspire to become homeowners—but poor or no credit, lack of access to mortgage credit, and difficulty putting together a down payment can stand in the way. Lease-to-own agreements might present an opportunity for renters to lock in today’s low home prices and potentially even low interest rates while having a longer period of time to transition to homeownership. However, these agreements have a checkered past and often present more risks than rewards. A new Center for American Progress brief explores the risks and opportunities of lease purchase and puts forward a set of recommendations for creating a structure that works for consumers.
“With many consumers locked out of the mortgage market, more landlords may begin offering lease-purchase agreements. If structured right, lease purchase could help put these renters on a path to sustainable homeownership. Without appropriate protections, on the other hand, these agreements could cause significant financial harm to families,” said Sarah Edelman, Senior Policy Analyst with CAP’s Housing and Consumer Finance team.
CAP’s brief elaborates on the potential benefits and risks of such arrangements. For example, renters in lease-purchase arrangements can potentially live in higher opportunity neighborhoods that traditionally offer fewer rental opportunities, and these families would have more stability than typical one-year leases provide. However, these arrangements, if not well designed or inclusive of important consumer protections, can be costly and predatory. Common risks include a lack of an independent appraisal and inspection, maintenance costs typically covered by a landlord that are instead borne by the renter, no guarantee of conversion to homeownership, losing money on a bad deal, or even fraud and scams.
To ensure that lease-purchase agreements offer a safe opportunity for consumers to transition into sustainable homeownership, CAP offers several recommendations for single-family rental companies or other landlords to follow in lease-purchase arrangements:
- Take steps to ensure, to the extent possible, that renters who enter into lease-purchase agreements will have the ability to repay a mortgage for the price of the home at the time of purchase.
- Avoid rent premiums unless the renter receives immediate value and the premium is transparent.
- Upfront payments should be reasonable and cover only basic acquisition costs.
- Include an upfront appraisal and inspection before the renter agrees to a lease-purchase option.
- Program materials should be clear and consistent about the terms of the lease-purchase agreement.
- Provide would-be homebuyers with housing counseling that is approved by the U.S. Department of Housing and Urban Development.
- Renters should not prematurely assume the maintenance responsibilities of ownership.
- Landlords should consider alternative ways to support prospective homeowners, including reporting on-time rent payments to credit reporting agencies, offering long-term leases, and giving tenants the right of first refusal when ready to sell the property.
Click here to read “Lease Purchase Failed Before—Can It Work Now?” by Sarah Edelman, Michela Zonta, and Julia Gordon.
For more information or to speak to an expert, contact Allison Preiss at firstname.lastname@example.org or 202.478.6331.