Mortgage

Lease-to-own choices acquire traction with youthful shoppers

A significant portion of younger potential homebuyers would consider participating in a rent-to-own arrangement, a recent survey from Javelin Strategy & Research shows.

More than half (55%) of Gen Zers and 37% of millennials are willing to enter into one of these transactions, Javelin disclosed in a report on the home lending industry, “Mortgage Pandemic or Just the Sniffles: Fast-Track Cures and Long-Haul Boosters.”

To be sure, rent-to-own agreements currently make up less than 2% of living situations, but Javelin said that points to a broader business opportunity for banks, lenders, investors and incubators.

In particular, they suggest lenders should shift from focusing on long-term purchase mortgages to offering a suite of living solutions centered on the flow and changes in people’s life cycles.

Younger consumers are more interested in a “test drive” of any property they might occupy long-term, said Babs Ryan, lead analyst for Javelin’s digital lending practice.

“What they want is an opportunity to try something before they dive all in,” Ryan said. “They don’t know if they’re going to like the home.”

While some interested in rent-to-own don’t have the funds for a down payment, it is not universal. Catering to renters and those in multigenerational households engages a greater population than homeowners, since 14.3 million renters plan to move in the next 12 months vs. 5.4 million people who already possess a primary residence, U.S. Census data shows.

“The No. 1 reason why the mortgage market has been so depressed is that lenders have not given people reasons to move,” Ryan declared. “They have provided products after they’ve decided to move, but they haven’t given them reasons to move.”

For Gen Zers and millennials, living in a multigenerational home saves them money while they’re not in a committed relationship, and also allows them to avoid a market where home prices and interest rates are rising.

“The pandemic’s created a lot of uncertainty about life, that’s what’s behind this,” added Ryan. “Why would I commit to buying a house or condo if I don’t know what I’m going to do three years from now? We heard that over and over.”

Javelin found that among consumers rent-to-own has low recognition, even though one company in the business, Landis, has investors with celebrity name recognition, Jay Z and Will Smith. Other companies like Pathway Homes and fintech Divvy also are active in this business line.

However, several of these arrangements have come under regulatory scrutiny for alleged predatory lending, generating a warning from then-New York State Department of Financial Services Superintendent Maria Vullo in 2018.

Also, Vision Property Management settled a lawsuit brought by the NYDFS and Letitia James, the state’s attorney general, for $3.75 million in 2020. But the company was later sued that same year by Michigan-based civil rights organizations for its practices.

Ryan noted that in many instances to date consumers were only offered rent-to-own opportunities because it was the only way they qualified and that contributed to the legal sensitivities in the Vision lawsuits.

A  broader opportunity exists for the mortgage industry in the rent-to-own space because “nobody’s gotten the formula right,” she said. 

“If somebody did, it would really work for consumers and it could be a win-win for the investors as well,” Ryan added

An example for U.S. lenders to copy is Lloyd’s Bank in the United Kingdom, which not only offers “buy-to-let” mortgages, but has put together a venture, Citra Living, that is reportedly investing in up to 50,000 newly constructed homes on that basis, Ryan said.

Rent-to-own options normally add dollars to the list price, whether for a home or a consumer good. But models that put a portion of the rent toward the down payment can help people save for a home. And that’s just one of hundreds of ways rent-to-own can do that.

Also, having to pay extra to have the option to walk away from the deal is something younger consumers value, she added, reiterating that mortgage lenders are concentrating on fixing the wrong problem.

“Instead of focusing on faster servicing or quicker onboarding, they should be focusing on ‘why I can help somebody move,’ creating solutions that help people throughout their lives rather than simply focusing on products for somebody looking to buy something,” Ryan said.

Among the surprising findings Javelin came across is that many consumers see rent-to-own as an opportunity to test out purchasing a second home or even an investment property that will be sublet.

This way they can see if the “snowbird” lifestyle works for them, said Ryan. As for the investment property, using rent-to-own allows the potential purchaser to see if it can be a viable business for them.

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