“Right to Rent” Gathers Momentum

Following up on yesterday’s post (Is it better to rent than buy?), today I thought I’d blog about the switch from owning to renting, in practice. In order to solve both the glut in housing supply and the shortage of rental housing, the government is trying to make it easier for “victims” of foreclosure to stay in their current properties as renters, even after they no longer own the respective properties. “The bill would remove legal impediments blocking federally regulated banks from entering into long-term leases – up to five years – with the former owners of foreclosed houses. It would also allow banks to negotiate option-to-purchase agreements permitting former owners to buy back their houses.”

The idea works as follows: after foreclosure proceedings are completed, the previous owners would be given the option of renting the property at a market rate. After a few years of such an arrangement – assuming that all rent payments were made on time – the tenants would then be given the option to purchase the property back. This might seem familiar, and some of you might recognize this arrangement is a tweak of a traditional lease-to-own option, which are usually used to facilitate the purchase of a house, not after foreclosure.

Under current rules, lenders are permitted to rent to the previous owner (or anyone else for that matter), but since the idea is to sell the foreclosed property, lease arrangements are usually only month-to-month, and the owner-turned-tenant can be evicted at any time, once a permanent owner is found. Under the proposed legislation, “The mortgage holder is permitted to resell the house after foreclosure, but any buyer must honor the existing lease. Rents can be increased yearly, according to the Labor Department’s consumer price index for rents in the area.”

Of course, this idea is not without its faults. First of all, there is the notion that if a homeowner cannot afford the mortgage payments on a house, is it reasonable to expect him to be able to make rent payments as a tenant. There are other critics who insist that the legislation has not gone far enough, by giving banks the option – but not the obligation – to rent foreclosed properties back to the previous owners. Finally, there are some who insist that lenders are not suited to being landlords.

This notion is reflected in a variation to this arrangement, under which a third-party investor is introduced into the equation. “First, the bank agrees to a short sale to a private investor, just as they often do now….The investor is contractually bound to lease back the house on a “triple net” basis – the tenants pay taxes, insurance and utilities – for two to three years…The deal comes with a preset buyout price after the leaseback period. That price is higher than the short-sale price paid by the investor, but lower than the original price of the house paid by the foreclosed owners.” Under such an arrangement, everyone should theoretically emerge satisfied – the lender, investor, and homeowner/tenant.