TAMPA — The twin phenomena of cheap housing and people’s poor credit is encouraging some investors to jump into a niche real estate market: rent-to-own housing.
One group of Houston investors, for example, has bought at least two-dozen homes in Hillsborough County and hundreds more nationwide for as little as $15,000 apiece and is offering them rent-to-own. Admittedly, the homes are in low-income neighborhoods and often need repair.
At least a couple of other firms that target higher-end houses have recently moved into the local market or are close to doing so.
Such arrangements have been around for years, but new players in the business say people’s trouble getting mortgage loans coupled with a mass of foreclosed homes is creating new opportunities in Tampa Bay-area real estate.
In Tampa, April and Billie Anderson recently entered into a rent-to-own contract on a two-bedroom, two-bath house in the Sulphur Springs neighborhood. She didn’t even try to get a mortgage because she figured her credit was hurt by hospital bills, some late payments and overdrawn bank accounts.
So, she signed a deal to pay $650 a month on their house, a portion of which will be put toward the eventual purchase price.
Anderson said she got a fair deal from the owner, Morningside Funding of Houston, but acknowledges some doubt over the price the company will charge her to buy it. Land records show the company bought the home in a bulk sale from mortgage giant Fannie Mae for $21,295. Her cost to buy it is somewhere around $60,000, she said.
Rent-to-own contracts — sometimes called lease-option, or a related concept called lease-purchase — allow people to rent a home for some period before purchasing it. The model has been around for years and often is more popular in a bad real estate market when houses aren’t selling.
That’s not necessarily the case today. The housing market has improved dramatically and sellers don’t need to offer incentives such as rent-to-own options nowadays, said John Lum, a developer and owner of The Galleria of New Homes in South Tampa.
In fact, the number of homes in Hillsborough and Pinellas counties listed as rent-to-own properties — or through a related arrangement called owner financing — has fallen from 680 two years ago to 206 today, Lum said, using Multiple Listing Service data.
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To be sure, some rent-to-own homes are listed on websites such as Craigslist and don’t go through Realtors.
A few finance companies and investors groups are bucking that trend lately and see opportunity in all the would-be homebuyers who want to own instead of renting, but don’t have the credit scores to do it.
Morningside Funding of Houston has been buying up Fannie Mae-owned homes since at least 2010. Of its 800 or so home purchases, maybe 300 are in Florida, said David Gibbs, one of the company’s four investor members.
The company targets people who can’t get conventional financing and gives renters 30 years to pay off a home. It applies a portion of their monthly rent payment to the eventual purchase price, Gibbs said.
His company targets homes through Fannie Mae bulk sales — often modest or dilapidated homes that the mortgage giant has had trouble selling off through Realtors. Some have fire damage; some have to be demolished, Gibbs said.
“There’s not really enough time or enough energy to look at or evaluate these properties one by one,” Gibbs said.
Morningside Funding caught the eye of one skeptical Realtor, Maggie Beard, who noticed the big price mark-ups on some of its houses.
Beard tried to buy a dilapidated house in Plant City on behalf of a client, who simply wanted to tear it down.
Her client offered Fannie Mae about $21,000 for the house and thought she had a contract on it, but instead the mortgage giant withdrew the deal and pooled it up with other low-cost homes in a bulk sale. Morningside Funding bought the home in October for $16,250.
Today, one of Morningside Funding’s websites, www.investmentproperties ondemand.com, lists it for rent for $675 a month with an option to purchase for $69,000.
Beard said she got upset when she saw that marked-up price, which she called “ridiculous.” The property was in such poor shape that her client was going to raze it and use the land for an adjacent strawberry farm.
“It had been a problem for these people (her clients) for a very long time during the time it was in foreclosure,” Beard said.
Gibbs said his company can only sell homes for what the market will bear, and it works with people to come up with a fair rent. Overall, he said he and his partners haven’t made a killing.
“It’s been OK,” Gibbs said. “It hasn’t been great in the four years we’ve done it. We haven’t lost money.”
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Elsewhere around the Bay area, other investors are shooting for middle-class homes with selling prices closer to $200,000 than $20,000.
Charles Richardson, a regional senior vice president with Coldwell Banker, said one rent-to-own company he’s talked with is expected to start marketing rent-to-own properties in the Bay area soon. He wasn’t at liberty to disclose its name this week. A second out-of-town player, Cove Financial Group of Irvine, Calif., started offering rent-to-own homes out west and is making its way east. It just started doing radio spots in the Tampa area.
It’s targeting people who want to buy a home, but can’t get a loan right now because they’ve had a foreclosure or short sale. The hope is they will qualify for a mortgage in a few years, Cove Financial Chief Executive Officer Patrick Flanagan said.
Flanagan’s company has a very different model from Morningside Funding. Instead of buying houses and trying to find renters for them, Cove Financial finds renters first and encourages them to work with a Realtor to find their own house. Cove Financial then purchases the home on their behalf.
Renters put up a 5- or 10-percent deposit — $15,000 on a $150,000 home, plus a 3 percent transaction fee — and have six years to buy the house from the company.
People rent their home until they purchase it, but in the meantime, “It feels much more like homeownership,” Flanagan said.
People considering leasing a rent-to-own home need to understand what they’re getting into, said Shawn Yesner, a local real estate attorney. Landlords often require tenants in rent-to-own properties to do their own maintenance, and some unscrupulous landlords sell homes to rent-to-own buyers at prices that suggest they’re in good shape.
In reality, some of the homes need thousands of dollars of repair work.
The ultimate cautionary tale: One of his clients moved to the Bay area from Pennsylvania and signed a contract for a rent-to-own home.
“This guy asked for $19,000 as a down payment,” Yesner said. “She lived in Pennsylvania and moved here for the warmer weather. Within weeks they said, ‘No, you’re evicted. You’ve got to get out.’”
That isn’t necessarily a typical experience, though. As long as everything is disclosed up front, Yesner said rent-to-own deals can work out for everyone.
Said Flanagan, “There’s a whole universe of people who are credit-worthy and are on the path to recovery, but just haven’t seasoned long enough to qualify.”