Wall Street firms have found a new way to profit from consumers with blemished credit who can’t qualify for a mortgage: let them rent a home first with the option to buy it later.
As The Wall Street Journal reports, rent-to-own programs, once run mainly by small operators, were popular with cash-strapped consumers during the 1990s. They faded a decade later when easy lending made it possible for almost anyone to buy a home with no money down, but with lenders setting a higher bar, they are making a comeback.
For investors, it is a chance to profit off the recovering housing market. Consumers get a chance to lock in a home before they have the money together for a down payment. But the price may be higher rent in the interim and a higher purchase price the longer they wait to move from renting to owning.
One of the fastest-growing rent-to-own companies is Home Partners of America, which was co-founded three years ago by former Goldman Sachs executive William Young. Mortgage securities veteran Lewis Ranieri was an early investor in the company, and real-estate mogul Sam Zell has acted as an adviser to Young. Late last year, Home Partners received a $500 million equity investment from a group led by money manager BlackRock Inc.’s alternative investments arm.
Young, who formerly co-headed Goldman Sachs’s European mortgage department, says he saw an untapped market helping people who are being shut out of the housing market. He says his company spent $100 million to buy about 320 homes in June, up from $15 million, or 66 homes, in June of last year.
Home Partners isn’t alone in seeing a profitable niche in the rent-to-own space. New York City-based HomeLPC, started by a former Lehman Brothers banker, launched about a year ago and has expanded to three states, where it has bought two dozen homes. It plans to expand into five more states by the first quarter of 2016. Premium Point Investments, a New York-based asset manager, is in the midst of testing a rent-to-own business focused on the South and Southeast.
Whether rent-to-own will prove to be profitable remains to be seen. A number of companies that rent out single-family homes have found that few renters have become buyers, either because they haven’t been able to restore their credit or haven’t been able to save enough for a down payment.
