Lease-purchase contracts explode

By Mia Sullivan, The Hustle

Next Impossible mission movie, Ethan Hunt should try to buy a house.

Home prices have risen faster than ever in 2021, mortgage rates are the highest since 2008 and limited supply means buyers are scrambling for whatever they can get.

But an alternative option that offers buyers another route to homeownership is gaining traction, for Protocol.

Rent sale…

…is a model that allows customers to make a monthly rental payment, part of which is intended to become the owner of the property.

  • After a while, they can either buy the property in full or continue the monthly payments.

The movement is fueled by fintech startups such as Divvy, Verbhouse and ZeroDown, which buy homes with cash and rent them out to customers through lease-to-own agreements.

Here’s how it works

With Divvy, a standard agreement:

  • Requires 1% to 2% of the price of the house in advance, which will be used for the deposit if the tenants decide to buy
  • Charges a monthly rental fee, plus a home savings commission (i.e. your down payment savings account)
  • Locks in a future purchase price; however, tenants can opt out of buying and walk away with home ownership savings funds

Divvy’s program is designed for renters to become “mortgage-eligible in three years,” according to the company’s website.

But lease-purchase agreements are controversial

They have a history of being predatory and targeting low-income black and brown shoppers.

Critics also point to other downsides:

  • Rent-to-own encourages businesses to shell out cash and compete with humans for limited housing stock
  • Locked-in home prices could be bad for buyers if the market drops
  • There is no guarantee that tenants will qualify for a mortgage after their lease term expires

For its part, Divvy says that about half of its customers are able to buy their homes. But the market probably wouldn’t be as competitive if these companies weren’t picking up homes in the first place.

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