EDFC

Rent-to-own results can be mixed, but backers point to filled units and buyers' rebuilt credit

By Robert Preer, Globe Correspondent
The Boston Globe
August 31, 2008

The Carruth, a mix of affordable apartments and market-rate condominiums in Dorchester, opened earlier this year, as the market for condos had turned sharply downward.

Sales of the 42 condos in the building languished, with only three sold to date.

So, developer Trinity Financial Inc. of Boston decided to offer the units as a variation of rent-to-own - leases with an option to purchase at a potential discount.

"We've had great success with it so far," said Abby Goldenfarb, project manager for the developer, noting that nearly all of the 20 new renters have signed up for the purchase option. "We are really trying to respond to the market."

In today's tight credit market, rent-to-own can be attractive to parties on both sides of a housing deal. For developers, it brings cash flow to properties that otherwise would be stagnant. For hopeful buyers, who may be struggling with poor credit or a recent foreclosure, it is a way to rebuild credit worthiness and start on the path to homeownership.

"It is our belief that a good number of folks who have been foreclosed on are good people who fell prey to unscrupulous mortgage brokers," said David Rodriguez-Pinzon, chief executive officer of Economic Development Financing Corp., a Dedham developer. "This allows them to build a credit history over three to five years, and it provides them with a quality condominium unit in the end."

Economic Development Financing Corp., also known by its initials EDFC, is using rent-to-own in three projects now under development. They are the 82-unit downtown Brockton Renaissance Village on the site of two former shoe factories; a downtown Worcester development with more than 150 units on South Main Street; and the 275-unit Residences at Riverview in Mattapan, next to the Massachusetts Bay Transportation Authority's Mattapan station.

The arrangements offered by both Trinity Financial and EDFC are not pure rent-to-own. Renters are not legally bound to purchase, and portions of the rent are not earmarked for down payments.

At the Carruth and the EDFC projects, the arrangements are that renters have the option to purchase their units later at a pre-determined price.

If real estate values climb in the intervening time, the renter would be able to buy the property at a discount. And Carruth developer Trinity Financial is exploring the possibility of deals in which portions of rental payments would be applied to down payments, according to Goldenfarb.

While there are only a small number of rent-to-own developments in Massachusetts, they are more common in other parts of the country, especially areas hardest hit by the mortgage crisis.

"You see it in Florida and other areas where there are more distressed properties," said Jesse Holland, president of Sunrise Management & Consulting in Latham, N.Y. "Often a developer has sold some of the units and can't sell any more. You can't go forward and you can't go back."

Rent-to-own arrangements typically are offered in newly built condo developments in which units are not selling or are selling slowly.

"It is getting more difficult to sell at the speed developers need to recover their investment," said Jon Gollinger, East Coast chief executive officer of Accelerated Marketing Partners. "There is cash flow that is needed when they are sitting there empty."

Rodriguez-Pinzon of EDFC said an added incentive for his company is the federal tax credit for historic properties. Under the rules of the tax breaks, developers must keep properties as rentals for five years, but afterward can offer the units for sale.

EDFC is seeking the tax credits for its Brockton development, part of which is in a four-story brick 19th century shoe factory, and its project in Worcester, which is partly in the city's former Boys and Girls Club building.

Rent-to-own offers sometimes prompt suspicion, in part because of the poor deals consumers have gotten with furniture and home electronics, as well as real estate.

"The rent-to-own field doesn't have a great reputation with affordable housing advocates," said Tom Callahan, director of the Massachusetts Affordable Housing Alliance. "In the past, it has been populated by scam artists and fly-by-night businesses. The design of the arrangements are often skewed to not giving renters much."

The two developers testing it now - Trinity Financial and EDFC - both have good reputations in providing affordable housing in the area, according Eric Gedstad, spokesman for MassHousing, a state agency that finances housing construction. The agency provided a loan for the Carruth.

"We are definitely supportive of it," Gedstad said of rent-to-own. "As the lender, we are gratified that the developer has cash coming in. It makes sense for potential homeowners. The more time that goes by the better the opportunity for someone to repair their credit."

Aaron Gornstein, executive director of the Boston-based Community Housing and Planning Association, also voiced support for the arrangement. "It does help to meet the demand for rental housing," he said.

There can be pitfalls for potential buyers, according to real estate professionals. Rent-to-own typically is offered in areas where real estate values are weak, so buying in these areas can be risky.

"Some of the lower-income areas are being hammered, so if you are a buyer, you want to make sure it's a good piece of property," said David Luczkow, vice president of business development for OptHome, an online real estate advisory firm based in Southborough.

In addition to getting time to build or repair a credit history, potential buyers also gain from the opportunity to live in a place before making a big commitment. The Carruth has advertised its rent-to-own units as "test drives."

"It can be a real win-win," said Gollinger. "The real advantage to renters is they get to test it first."

According to Callahan, rent-to-own deals are typically hard to pull off. "Usually you are talking about a renter who for whatever reason can't buy or isn't ready to buy," he said. "During the rental period, a lot of things can happen that will make them less likely to buy rather than more likely to buy."

© 2008 The New York Times Company Photo at top right: Developers of the Carruth in Dorchester are renting condos with an option to purchase later at a discount. (George Rizer/Globe Staff)