Millennials were the largest group of U.S. home buyers in 2016, according to Zillow Group Report. Nevertheless, they still lag behind previous generations by about three years in the age at which they are becoming first-time homeowners.
There are a number of obstacles for millennials to overcome when making their first home purchase. Affordability issues such as longer stints in school (and the accompanying debt to fund their educations), delays in marriage (and the accompanying reliance on a single income), difficulty obtaining mortgages and struggles to make a down payment because of higher home costs are just some of the principle problems. Further, there is a declining number of starter homes on the market, while more baby boomers stay in their homes longer or retain their homes as investment properties.
Nevertheless, one solution that first-time buyers should explore on the road to homeownership is rent to purchase (RTP), or programs that get them into a house now with an option to buy later.
Today's marketplace issues
Houses are daunting financial hurdles today. Homeownership rates for those under the age of 35 is 34.1 percent, according to the Washington Post. That's half the national average and a record low.
The housing inventory shortage is affecting entry-level homes more than any other sector. Starter home supplies are dropping 17 percent year over year, which is more than three times faster than larger homes. Meanwhile, small single-family homes in the most desirable areas are simply not lingering as they vanish from the market.
Another element affecting inventory is the fact that 85 percent of baby boomers who are homeowners do not plan to sell in the next 12 months, according to Realtor.com.
Rent-to-own agreements
The solution for many aspiring homeowners, of any age, is renting. For example, even if they have enough for a down payment, 62 percent of millennials shop for a rental while looking to buy a home, according to a survey cited on CNBC. However, deciding to keep renting does not get them closer to their goal of purchasing their own residence.
Instead of just renting to buy time until inventory improves or building a down payment fund, prospective homeowners may want to consider a rent-to-own (RTO) option.
These agreements can be excellent alternatives for those who want to get into a home but are not financially ready to become homeowners. This helps them lock in the home they would like, improve credit worthiness and, with a percentage of rent going toward the purchase price, build some equity in "their future home."
Weighing the options
There are different types of RTO or RTP options out there and they all offer a simple way to get into a home at a lower cost per month. Allowing renters to purchase the home later at a preset price, much like a car lease.
The agreement with the current owner or property management firm usually specifies a one-time, nonrefundable fee called option consideration or option money. This gives the renter the right to purchase the house in the future.
Those interested in moving into a rental with an eye toward future ownership, however, need to be aware that there are a variety of agreements out there. Some RTP program lease agreements establish the right but not an obligation to purchase the property. While others offer an RTP program with a one-year lease commitment, a guaranteed five-year lease and the right to buy at any point during the five years. This allows someone to decide if they like the house and neighborhood, while giving them five years to proceed with the purchase.
Like other leases, there is typically a security deposit requirement. Additionally, the agreement should also specify who has the responsibility during the pre-purchase period for making (and maybe approving) repairs or upgrades, homeowners association fees, insurance, property taxes and other expenses that need clarification between the current legal owner and the potential buyer.
Some more comprehensive contracts may allocate a portion of the rent toward the down payment or purchase price. Those agreements enable the renter to feel they are moving closer to ownership monthly. One downside, however, occurs if a tenant decides not to purchase the home; in this case, the funds accumulated toward a purchase are typically forfeited.
RTP contracts differ greatly based on local laws, demand and other factors. However, they do allow prospective homeowners to explore a wider range of homes, including ones they might never qualify for today because of either price or credit concerns. Rent-to-own arrangements also enable potential homebuyers to move in sooner, rather than later, despite today's tough market. They offer a way for millennials or adults of any age who are renting to realize dreams of homeownership and get settled in their new home far earlier.
Ryan Boykin is co-founder of Atlas Real Estate Group, a Denver-based full-service realty firm specializing in investments, brokerage and property management.
ABOUT ATLAS REAL ESTATE GROUP:
Atlas Real Estate Group is a full-service real estate group specializing in investments, brokerage and property management in Denver. The firm, named Best of Colorado Property Management 2017 and 2018 by ColoradoBiz Magazine, was co-founded in 2013 by Jason Shepherd and Ryan Boykin. The group’s internal real estate holdings are over $50 million, and it has bought and sold more than 4,000 properties on behalf of individuals and institutional investors, totaling over $750 million worth of transactions. The group manages over 2,200 units of residential investment real estate for its clients. The Atlas partners have been featured in many national and local publications including Bloomberg News, Wall Street Journal, Inc. Magazine, Forbes, Investopedia, Denver Business Journal, and the Denver Post. The company was built on the belief that in order to serve and understand a client’s needs effectively, you first need to understand their perspective as an owner of real estate. To learn more about the full scope of Atlas, visit www.RealAtlas.com.
