As high prices, rising rents and tight credit requirements continue to make homeownership difficult for many families, some private and nonprofit developers are trying to find ways to make homeownership more accessible for renters.
At least three developers of affordable housing in Maryland are building homes with tax credit financing typically used to create low-income rental communities, with a plan to sell the units to tenants 15 years later, when the tax credits expire.
Howard County is considering a program in which the Housing Commission would buy homes for pre-approved tenants, then lease back the house for about three years until the tenant can build the credit to take on the mortgage.
And, at the upper end of the market, Bethesda-based Bozzuto Group offers an incentive worth up to $10,000 for tenants of at least one year who go on to purchase a Bozzuto home.
In a market typically divided between buyers and renters, rent-to-own incentives can offer a viable alternative.
"It's an important thing to have on a menu of options," said Miriam Axel-Lute, editor for Shelterforce magazine and associate director of the National Housing Institute. "It takes a while to put a good program together, but they are out there."
Historically, the rent-to-own, or lease-purchase, model has been a tiny part of the housing market, and industry members predicted it will remain that way. For developers, acting as builder, property manager, credit counselor and seller all at once can be tough to pull off, while the complicated nature of a potential deal can lead to misunderstandings, or even shady dealing, especially in the private market.
"It's fraught with potential fraud and risk for the consumer," said Ascala Sisk, director of community stabilization at the Neighborworks, a national network of more than 240 community development and affordable-housing organizations. It is "really important that consumers are informed about what they're getting into," she said.
The recession — which produced a tremendous number of foreclosed homes and households unable to buy — spurred new interest in the model. Last year, one federal program that provides funds to build units for low-income families also changed its rules to require units be offered for rent after nine months, if no sales contract has materialized.
Rental incentive programs differ depending on the market. Bozzuto's SmartRent program — which essentially reduces the price if the renter goes on to purchase a Bozzuto home — is a kind of loyalty program, designed to reward "allegiance" to the company, said Bruce Rosenblatt, vice president of sales.
Tenants at 32 Bozzuto apartment communities in Maryland are eligible, including residents of Spinnaker Bay and the Promenade at Harbor East, the Zenith on Pratt Street and the Fitzgerald, near the Mount Royal Light Rail, according to the firm's website. Since 2010, 23 people have taken advantage of the deal, according to Cathy Leaning, the firm's senior director of marketing.
"A lot of people are renters for a temporary reason. They don't have a down payment or they need to improve their credit," Rosenblatt said. "It's a way of helping you and encouraging you to stay with us."
The Bozzuto program is not a "true" rent-to-own program, in which renters make payments toward the future purchase of a property they already occupy, he added.
Public lease-purchase programs today often aim to help prospective buyers grappling with shaky credit histories and difficulty obtaining a loan, said David Cramer, a Baltimore-based consultant who teaches classes on affordable lease-purchase programs.
That's the case in Howard County, where the Housing Commission is considering allocating about $400,000 — which with borrowing could be leveraged to more than $1 million — to a new lease-purchase program focused on families the county already is helping with credit counseling.
Details of the program — such as what income level a family would need to be eligible — still need to be resolved, but the hope is to launch this fall, working with real estate agents on as many as 10 homes a year, said Thomas P. Carbo, executive director of the Housing Commission and director of the county's housing and community development department.
The goal is for households to assume title to the properties within three years, he said.
"This is really a homeownership program," said Carbo, adding that it also may help boost sales of condominiums, a weaker part of the county's housing market. "We're aiming at folks who want to be homeowners, and this is just an intermediary step they need to be able to qualify."
For renters in units built with low-income housing tax credits, the shift to homeownership is slower.
By law, those units — typically owned by private entities that purchase the tax credits — must operate as affordable rentals for at least 15 years. Under a lease-purchase deal, when the credits expire, the private groups' nonprofit partner would take ownership by assuming the property's remaining debt and work to sell the units to tenants.
Under some models, the prospective buyer assumes whatever debt remains on the property at the end of that 15-year period to acquire the house — theoretically a much lower amount than the price of a similar unit on the open market. In other cases, in addition to the debt, the nonprofit owner issues a "soft" second lien, to be forgiven depending on the residents' tenure, which is supposed to help maintain the property values.
"I think that is a good new wrinkle in using low-income housing tax credits. … It's a great way to create affordability for families," said Clarence Snuggs, deputy secretary of the state's Department of Housing and Community Development, who estimated that Maryland has about six such developments.
Baltimore-based Enterprise Homes closed the financing last month on the most recent one — Hollins Station, 48 townhomes in Lansdowne in Baltimore County.
The projects have met with demand. A community of 22 single-family homes in Glen Burnie, which regional nonprofit Interfaith Housing Alliance started leasing in December, received about 500 inquiries; an earlier set of 25 townhomes in Cumberland received some 200, according to president and CEO Patricia Motter.
For tenants — who must have incomes below a certain threshold, although typically higher than more traditional public housing to qualify — the chance at low-cost living is the primary draw. A Zillow analysis released Thursday found that median rents in the Baltimore metro area were $1,691, well above the national median of $1,318.
"It's affordable. I think that's the most important thing," said Tracey Roebuck, 45, who lives with her husband and three children in one of the 56 townhouses in Homes at the Glen in Annapolis, a lease-purchase townhome development that Annapolis-based Homes for America completed in the early 2000s with low-income housing tax credits.
Homes for America President and CEO Nancy Rase said the nonprofit developer, which also completed lease-purchase projects in Cumberland and Cambridge in the last five years and has another planned in Aberdeen, started using low-income housing tax credits this way when home prices in Maryland rose and simply subsidizing purchases became too expensive.
She said she is sensitive to concerns that the strategy may reduce the supply of affordable rental housing, but said families need more access to homeownership than they can find on the private market right now.
"If we had a viable alternative for entry-level homeownership … I wouldn't be enthusiastic about using what could be long-term rental resource for homeownership, but we don't have any options," Rase said.
Roebuck, who has earned a master's degree since she moved in to Home at the Glen, said the low rent gave her family stability that allowed them to build for a better future. And while it wasn't part of an original plan, she's excited about the prospect of potentially owning her three-bedroom townhouse — a possibility that would otherwise be a stretch for her family in the expensive area.
"The key is being able to put people in a situation where they can utilize their talent, go to school, get a good education, come out get a good job and find a purposeful life," Roebuck said. "To have this type of property is just a good financial investment to build [equity]."