With rising rents making it more difficult for many to even save the 3% down payment they now need to buy a home, and with some borrowers still struggling to get a mortgage, a new option is emerging as an avenue for consumers to live in the home they want and save money to buy it at the same time – rent-to-own.
A new report from Moody’s Investors Service highlights Home Partners of America and its “unique” blueprint for property acquisition.
According to Moody’s, Home Partners of America works with prospective homebuyers who want to buy but can’t for various reasons, whether it be credit issues or a lack of savings, to identify and purchase properties that the consumers select, but can’t buy themselves.
Home Partners of America then rents the property to the consumer with a goal of selling the property to the tenant at some point down the road.
Home Partners of America purchase philosophy runs counter to many companies that have seen success in single-family rentals, buying distressed properties, renovating them, and then renting them out.
Home Partners of America purchases properties chosen by the tenant, with the consumer-selected properties more likely to be “higher quality and in more desirable locations (such as those with better school districts)” than properties purchased through bulk foreclosure sales, Moody’s said in its report.
So here’s how Home Partners of America’s program works, from the Moody’s report:
Under its Right to Purchase Program, HPA leases single-family properties to people who are looking to buy a property but have limited access to mortgage credit. The prospective homeowner chooses a property that he would like to eventually buy, and if the property fits HPA’s criteria and the tenant qualifies, HPA buys the property and the tenant enters into a lease and Right to Purchase Agreement that allows the tenant to buy the property at a pre-determined price during the term of the lease, which is typically between three to five years. The purchase price typically increases by 3.5-5% per year throughout the term of the lease.
According to Moody’s, Home Partners of America isn’t simply buying whichever house a consumer chooses. Moody’s states that Home Partners of America has its own underwriting and investment criteria that must be met before a purchase is made, including only in select communities whose school districts achieve high average test scores, for example.
And according to Moody’s, this program has advantages for the consumer, Home Partners of America, and investors alike, especially considering that Home Partners of America just went to market with its first single-family rental securitization.
Moody’s said that the securitization, Home Partners of America 2016-1, should be attractive to borrowers because of Home Partners of America’s model.
“HPA acquired the properties backing the transaction based on requests from prospective homeowners who desired to rent the properties with eventual options to purchase,” Moody’s writes in its report.
“As a result, the transaction is likely to delever faster than will other single-borrower SFR transactions because HPA will prepay the loan at a premium to release the properties from the transaction if and when renters exercise their options,” Moody’s continues. “Furthermore, the strategy could benefit property recovery values because renters with purchase options are incentivized to maintain their properties well.”
The properties that Home Partners of America purchases also tend to be higher quality than other single-family rental operators, requiring lower rehab costs, but also requiring more money to be laid out initially.
By comparison, Moody’s states the average value of the 2,232 homes that make up Home Partners of America’s securitization is $247,483, while the average value in recent securitizations from Invitation Homes and American Homes 4 Rent was $167,631 and $143,066, respectively.
On the other hand, the average rehab cost for Home Partners of America is $6,669, while the average rehab cost for Invitation Homes was $22,984 and the average rehab cost for American Homes 4 Rent was $15,209.
If a borrower exercises their option to purchase the property, Home Partners of America must purchase it out of the securitization at a premium, which represents a “credit positive” for investors, Moody’s said, adding that it expects some tenants to do just that, using their time as a renter to build credit and save up money for a down payment.
And that turns renters into buyers, which is still advantageous for consumers in much of the country.