5 Point Checklist: Are You Ready to Launch a Lease-Purchase Program?
With the home-buying market still in the doldrums, many NSP grantees are beginning to consider renting or leasing-to-purchase the homes they are rehabbing or building. These grantees want both to bring in income to cover carrying costs, and to make sure homes are occupied with residents who will look after the house as well as the neighborhood.
Lease-purchase has a spotty reputation for reasons that are well documented and mostly avoidable now. Mainly, early iterations of this program failed to understand and plan for a period of time in which the responsibilities of the program were identical to managing rental housing, for the vagaries of consumer preference, and for screening lease-purchasers to ensure they could convert to ownership in a timely fashion.
NeighborWorks America’s "Are You Ready For a Lease-Purchase Program?" offers a five‐point checklist to help nonprofits avoid common mistakes and create a lease‐purchase program that meets their goals:
1. Do you have enough capacity - particularly in property management and housing counseling?
Because lease‐purchase combines both homeownership and rental, it requires an organization to provide – or partner with others to provide – sales, homeownership counseling, and property management. Property management may be particularly difficult, as it often requires managing scattered sites. During the lease period, your organization is a landlord, and it needs to be prepared to evict if the lease‐purchaser does not perform as a tenant.
2. Do you have clear selection criteria for potential lease-purchasers?
Some organizations make no distinction between the selection criteria for lease‐purchasers and those for prospective rental tenants. At the other end of the spectrum, organizations assess the prospective lease‐purchaser’s ability to qualify for a mortgage within a specified time period.
3. Do you have a solid lease-purchase contract?
Develop a well‐structured lease‐to‐own contract agreement and have it reviewed by a real estate attorney familiar with local landlord‐tenant laws. If a federal source of subsidy, such as NSP, is used, make sure the agreement complies with federal regulations, such as URA (Uniform Relocation Act). The contract should define who is responsible for ongoing maintenance issues (typically, the lease‐purchaser – a good strategy to develop ownership skills and values) and for major system repairs (the landlord – it’s your asset), and what benchmarks the lease‐purchaser is required to meet.
4. Do you have an exit strategy?
You need a plan to help the lease‐purchaser succeed, as well as a plan in case the lessee fails to perform. A good strategy includes:
- Measures to prevent failure – including good selection criteria and ongoing support, including homeownership counseling. Some programs require benchmarks to be met such as demonstrated progress on adhering to a family budget and reducing debt.
- A clear contract agreement that spells out in detail the responsibilities of the lease‐purchaser as both a tenant and a potential homeowner.
- Incentives and disincentives, such as setting the lease payment higher than the PITI for home purchase, collecting funds for down payment as part of the lease payment, or withholding that accumulated down payment if the lease‐purchaser walks out.
- A rental alternative for a lease‐purchaser who is a good tenant but is not going to purchase.
- The authority to evict, should it become necessary.
5. Have you developed a three-part pro forma?
Most real‐estate development uses either a development and operating pro forma or a development and sales schedule. Lease‐purchase requires a three‐part pro forma that captures development, operations during leasing, and a sales phase. Viewing all three phases is key to understanding the relationships among costs, leasing fee, sale price, PITI and affordability.
According to the 2011 State of the Nation’s Housing report, the combination of higher income, downpayment, and credit score requirements in today’s broader mortgage market will prevent many borrowers from getting the loans today that they would have qualified for in the 1990s and early 2000s before the housing boom and bust. It seems reasonable to assume that a stratum of the homebuyer market normally served by nonprofit organizations will simply be unable to achieve homeownership in a time frame anything like what we are used to. Lease-purchase may be a very appropriate method to assist them while ensuring that newly rehabbed homes are occupied and well-maintained.
Shelterforce recently published a very good article on lease purchase, “Can Lease-Purchase Save Us?”
HUD's Neighborhood Stabilization Program Resource Exchange has an online Lease-Purchase Toolkit.