If you’re hoping to become a homeowner in NYC, then chances are you’ll need a mortgage. However, getting one on good terms requires a high credit score, as well as a sizeable down payment, two things many people have a hard time getting. One way around this that’s starting to become more widely available the rent-to-own program. This is where you rent a home for a certain amount of time with the option to buy before the lease expires. Currently, there aren’t many rental buildings in NYC that offer this program. However, that may change in the year ahead.
There’s a lot to unpack here on how this program works as they are rather complicated. Some pros and cons need to be considered before deciding if this program is right for you. The following article will give you a rundown on those to help you decide what’s best for your future.
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What Does Rent-To-Own Mean?What Does Rent-To-Own Mean?
Each building that runs this program will have its own unique approach, with no two ever being the same. Basically, it works by allowing a portion of a tenant’s monthly rent to go towards the unit’s purchase price. Depending on the terms of the agreement, the tenant will then have either the option or obligation to purchase the unit at the end of their lease. How long the rental period lasts will also depend on the terms of the contract, but the average is about 1-3 years.
It’s meant as a way to give renters who love the building a chance to buy. They can take occupancy right away and, once they’re ready, make the purchase. Before the pandemic, rent-to-own was very rare in NYC. But since then, developers have started looking for new ways to get buyers to sign on the dotted line. The current glut in luxury condos has also acted as a spur for developers to find more creative ways to move inventory.
Rent-to-own programs come in two types, lease option and lease-purchase contracts.
Lease Option ContractLease Option Contract
This is when the tenant can buy the property at the end of their lease term, usually at the current market value of the home when the lease was first signed. In these types of leases, the monthly rent will typically be higher than the market rate. There may also be an option premium included for the right to purchase the unit. Depending on how negotiations go, both the rental and options premiums may go towards closing costs or the down payment if the tenant decides to buy. But if the tenant chooses not to buy, then the owner gets to keep all the rental income plus the premiums.
Lease-Purchase ContractLease-Purchase Contract
With a lease-purchase contract, the tenant will have an obligation to purchase at the end of their lease. How these contracts are structured will vary greatly in complexity and length. How much of the tenant’s monthly rent can go towards the down payment will also be worked out in the negotiations. Once the lease term is up, the tenant will be obligated to buy at a predetermined price. This price could be based on the market value at the start of the lease term, how much it appraises for at the end of the lease, or some other metric. If based on the market value at the time of the lease signing, the seller will likely demand an option premium.
What Sort of Renters Fit this Program?What Sort of Renters Fit this Program?
It doesn’t take an expert to know that almost every renter in NYC wants to be a homeowner. But with rents and other living expenses being so high, it’s challenging for most people to save for a down payment. Rent-to-own programs provide an easy option for those with large incomes that don’t have much in savings. Anyone who’s still building their credit score will also see the appeal. They can move in right away, start paying towards their down payment and building their credit at the same time. Additionally, they may also be able to lock-in the price they’ll pay for the home at a future date.
Rent-to-own is also sure to appeal to those who don’t qualify for a non-conforming jumbo loan. The high costs of real estate in NYC means that many people must turn to jumbo loans to receive financing. However, the stricter underwriting requirements of these loans make it harder for certain people to qualify. Those who are self-employed, contract workers or don’t have a U.S. credit history (i.e., foreign nationals) can’t qualify for these loans, despite having sound financials.
Downsides of Rent-to-OwnDownsides of Rent-to-Own
While rent-to-own can be a great concept, it also has several pitfalls and other downsides that you need to be aware of.
- Higher attorney fees – Due to the complexity of these sorts of transactions, which usually involve multiple contracts and prolonged negotiations, attorney fees tend to be higher. The normal flat-rate attorney fee for a regular transaction can cost $2,000-$3,000. With a rent-to-own transaction, the costs can be twice that or more.
- Higher rent than average – Most sellers will demand a higher-than-average rent for the privilege of buying at the end of the lease. In the case of a lease option contract, if you choose not to buy in the end, then you’ll have paid a higher rent for nothing.
- Not many buildings offer this – Even now, there are only maybe a handful of NYC buildings that offer this program. Most of them are large buildings that still have a lot of unsold units. The next year may see more developers turn to this option in an attempt to move stalled inventory, but it’s doubtful to take off in a big way.
Final ThoughtsFinal Thoughts
At first glance, rent-to-own sounds like a superb idea. But once you get into the details, they start to look a lot less appealing. The additional fees and complexity of these transactions can make you question whether it’s even worth it in the long run. Our advice is to look at other options first and see if you can’t just continue saving for a regular transaction in the future. For instance, if this is your first home purchase, there are plenty of first-time buyer programs that may fit you better. You can always raise the topic with your buyer’s agent, who can provide an up-to-date assessment of the current market and whether this approach could work for you.