First-time home shoppers are finding entry into California’s real estate market near impossible amid the 2020 Recession and pandemic. Rent-to-own businesses help bridge the gap between renting and owning by offering homeownership to buyers who are unable to secure financing through traditional channels. On the other hand, they have also earned an unfavorable reputation for shady legal practices, shoddy homes, and high eviction rates.
With housing stability a critical issue during the COVID-19 pandemic, rent-to-own companies see an opportunity to resuscitate their business model’s public perception. Will the recession and pandemic set the stage for rent-to-own’s second act?
The pandemic’s market effect
While the pandemic did not cause the 2020 Recession, it certainly accelerated its effects. The pandemic brought with it stunning job losses, leaving 14 percent of renters and 9 percent of owners behind on payments. In response, the Federal Reserve has pledged to maintain the federal funds rate near zero until the economy begins to pick up again.
The pandemic’s economic toll and the Federal Reserve’s lowering of interest rates created a two-pronged effect: buyers snatched up homes and refinances increased.
This has exacerbated California’s all-time low of affordable housing inventory. With housing demand outweighing supply in markets across the state, rent-to-own business like Divvy Homes see a unique opportunity.
How does Divvy Homes work?
Although the company’s tongue-in-cheek marketing attempts to distance themselves from their “rent-to-own” label, the business model has not changed much. But Californians’ housing circumstances have.
Who benefits?
With the conventional market hamstrung by multiple crises, Divvy Homes is the unconventional opportunist for homeownership. So who is best suited to rent-to-own?
Californians priced out of homeownership, but not out of the rental market, may be more likely to take on higher-risk homes and financial contracts that a conventional bank is willing to support. This is especially true of aspiring homeowners now being priced out of California’s high-cost markets.
Aspiring homebuyers with poor credit can also benefit from renting-to-own. With mortgage lenders tightening restrictions amid the recession, otherwise qualified candidates are being passed over because of their credit. Many rent-to-own agreements can help consumers build their credit and move in to a home while they do it.
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Divvy Homes also attempts to set itself apart from the competition by allowing buyers to pick their home right off the market, rather than limiting buyers to a preexisting inventory. Given California’s dearth of affordable housing inventory, this is a thinly veiled attempt at giving a false sense of choice to buyers with no additional benefit.
What are the risks of rent-to-own?
First-time home shoppers are often naive to this level of risk. The most common complaints about rent-to-own businesses are high costs and maintenance issues often related to substandard housing.
These businesses have also been criticized for misrepresenting eviction rates that threaten to reflect poorly on them. By targeting low-income communities and delivering low-quality homes, some rent-to-own operators bank on consumers walking away from their contracts after months of unexpected costs. The company then collects its early cancellation fees. Rinse, repeat.
Sound eerily familiar? The spectre of the 2008 Recession looms large over rent-to-own. Simply substitute sub-prime mortgages for high-risk housing with the “promise” of homeownership, and you have the same recipe for disaster.
Can rent-to-own atone?
The COVID-19 pandemic has offered a one-time reset button of sorts for businesses with checkered public relations. The market winds for rent-to-own businesses have blown perfectly their way, but the business model is poorly understood by consumers.
Home shoppers may consider consulting a trusted agent before entering into a rent-to-own contract. Real estate agents have a more intimate understanding of buyers at the individual level. Therefore, they can offer alternative insight rent-to-own companies might not otherwise consider or volunteer.
Brokers and agents — have you seen an uptick in rent-to-own questions during the pandemic? Leave your experiences in the comments below!
