Could the rent to own home sale market help pull the U.S. out of its economic slump?
According to Federal Reserve Chairman Ben Bernanke on Wednesday, June 22, the U.S. housing market is a strong and persistent factor hurting the broader economy. It's widely agreed that the massive amounts of foreclosures flooding the market with below cost pricing, is one of our country's biggest economic drains.
But as we've seen over the last few years, this is one big cycle with no end; foreclosures offered at below market pricing forces all housing prices to continue downward. Those who are trying to sell in order to avoid foreclosure have a threshold where they can no longer afford to sell their home and are forced to walk away, adding to the foreclosure glut on the market.
With lending restrictions reducing the amount of qualified buyers and declining house prices forcing homeowners into foreclosure, it simply regenerates more credit-damaged consumers unable to obtain financing and adds more pricing competition by continually adding foreclosures to the market.
The future isn't looking very encouraging either, with 1.2 million expected home foreclosures this year, according to Realty Trac, Inc. and an additional 1.7 million 'shadow inventory' of homes at risk of foreclosure lurking close behind, according to real estate data firm CoreLogic.
Eventually, we could become a nation of renters with the rich few as the exclusive property owners, or as previous generations called them: serfs.
One option gaining popularity that would help avoid that prospect is rent to own home purchases. The market is swelling every day with better than average credit risks who've recently had hard knocks to their credit rating, but have been otherwise responsible with their obligations. Those buyers will be unable to obtain traditional loans for a period of time while there are almost as many home sellers waiting for their telephones to ring with an offer.
By government encouraging private rent to own home purchases with tax breaks and financial incentives there would be a reduction of homes going into foreclosure and being added to the market, stabilizing home prices. Rent to own home sales would add a layer of 'privatized' protection between the lender and reclaiming a foreclosed property, instead continuing existing loans at their current interest rate.
Additionally, the sellers have to live somewhere as well. They may choose to scale down their home choice and rent to own a less expensive place, providing additional cash flow after mortgage payments are met. With the rental market flooded with the onslaught of foreclosed property owners, rents continue to increase. Renting to own establishes a rental rate that is good for the extent of the loan, providing additional incentive for buyers.
If they choose, real estate agents and brokers could expand their services to include aspects of property management, keeping themselves in the mix while providing valuable services to inexperienced home buyers and sellers. They could charge an amount equal to a percentage of the down payment to find buyers and sellers, facilitate the paperwork, and provide background and credit checks, among other things. Later they will collect their real estate commissions when the transaction closes down the road, which is better than never collecting a commission. For a monthly fee a broker could facilitate the monthly rental/payment exchange as well.
Government incentives would generate even more interest from other professionals related to the home sales industry, offering their help and expertise to help facilitate a successful rent to own transaction.
Needing to be addressed however, would be the risks typical with a rent to own home purchase, first by the parties themselves, and hopefully expanding into acceptable practices and laws.
Home sellers are risking their property to strangers and home evictions and property damage are expensive. Additionally, the biggest risk to a successful rent to own transaction for both parties is when the buyer is unable to qualify for a traditional loan at the end of the lease period. Home owners are back where they started, and if they are unwilling to take another chance on the buyer qualifying, they may choose not to extend the agreement and the buyer loses his down payment plus any rent credits earned during the term of the lease.
To be effective and to ensure a rent to own home sale result there needs to be proof that the buyer is working with someone credible to help rectify credit issues, and the length of the lease needs to be long enough for the buyer to qualify for a traditional loan.
Additionally, there needs to be proof that the owner is current on payments and not near foreclosure, that there are no outstanding liens and that the buyer's payments will be applied to the mortgage and not to the owner's pockets. Lenders could help facilitate this, earning an extra fee while looking after their existing loan assets.
It seems as if there could be ways to combat this economic funnel, help increase home ownership and stop the bleeding from the main economic artery - the housing market. By researching and participating in the rent to own home sale individuals can start now to help take control of their financial futures and hope other professionals fall into line. But it would certainly get a major lift if the government would provide additional incentives for people to take a more 'privatized' step to economic recovery.
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