Is It Time To Turn Foreclosures Into Rent-To-Own Properties?

If ever there was a case for owning rental real estate, that case was probably made by two reports which came out during the past week.

First, we have the announcement by Freddie Mac that mortgage rates reached an historic low — just 3.84 percent for 30-year, fixed-rate financing. For people who have been in real estate a long time this rate looks like a typo or maybe the interest paid for a savings account. It’s just hard to believe.

Second, Trulia reports that April rents were 5.6 percent higher than a year ago. That’s a bright, positive sign for real estate investors.

Interest Rates

The continued availability of mortgage money at historically low rates is both surprising and counter-intuitive. With some economic expansion the usual idea is that rates will increase because the demand for capital will grow. Today there is some sense of economic growth yet mortgage rates remain remarkably low. 

Could interest rates actually go lower? This may seem like an odd subject given that rates are now at historic lows, but there’s no rule which says they cannot go fall further.

Real Estate Prices

Real estate is a localized commodity and Trulia reports that on a seasonally-adjusted basis 44 of the 100 largest metro areas had year-to-year price increases. In the shorter term, Trulia says 92 of the 100 largest metros saw prices rise on a quarter-to-quarter basis.

Also, the federal government says home prices rose 0.3 percent in February. That’s good news but a little context is in order: Home values remain almost 20 percent lower than the highs we saw in 2007.

Rent To Own

Will strong rental demand continue? It seems reasonable because we have a rising population, relatively little new construction and a large number of people who have been displaced by foreclosure and short sales. Each of these factors creates additional shelter demand.

Owners who have lost properties are unlikely to buy or finance for several years. However, they sometimes have good monthly incomes and that raises a question: Will investors buy distressed properties at discount and instead of straight leases offer rent-to-own deals for tenants? Such arrangements might be attractive if they can give investors higher rents, longer leases, fewer vacancies and also allow tenants time to re-build credit.

Rent-to-own deals need to be carefully structured so that lenders give appropriate credit to buyers if they elect to purchase. Speak with lenders for specific requirements and have a local real estate attorney advise before considering such arrangements.

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