New rent-to-own programs are allowing tenants to use their rent toward down payments
In the rent-to-own program at the Decora in Williamsburg, all rent goes toward the down payment.
As the market sours and potential first-time buyers become more indecisive about whether it makes sense to plunk down money for a purchase, some developers are allowing them to hold off on the big decision.
Those developers, who are predominantly in Brooklyn, are trying to woo would-be buyers with deals that allow them to rent a unit in a condo building while at the same time putting their monthly rent checks toward a down payment.
The so-called "rent-to-own" programs, which started popping up in the last few months, collect the rent money in escrow until the end of the lease period.
Early last month, the real estate Web site Curbed.com reported that Toll Brothers was offering units at the first tower in their Williamsburg waterfront development Northside Piers on a rent-to-own basis. A week later, the site reported that another Williamsburg condo, the Decora on North 10th Street, was doing the same.
It turns out that they are not the only ones.
In Fort Greene, the Clarett Group is mulling doing the same thing for its condo, the Forté, where sales have been sluggish.
"Because of the overall economic climate, potential buyers are having trouble making decisions about whether to buy now," said David Von Spreckelsen, Toll Brothers' vice president.
"And even once they do decide, they are often having difficulty lining up mortgages that suit them," he added. "So, offering a rent-to-own scenario allows them to get into our building now, but allows them to make the ultimate decision later — and hopefully then, much of the confusion in the mortgage market will have abated.
"We are confident that once these potential buyers are living at Northside Piers, they will want to stay, and will become buyers," he said.
Von Spreckelsen said that at Northside Piers, potential buyers sign a one-year lease, but must be prequalified by a mortgage company to purchase the unit they will be leasing. If the renter decides they want to purchase, a portion of the rent they've been paying will go to a down payment on the condo.
The cut that goes toward the down payment depends on how quickly the tenant commits to buying.
The faster he or she decides, the more rent the developer diverts to the down payment, Von Spreckelsen explained.
The fine print on an advertisement for a rent-to-own unit at Northside Piers noted that 100 percent of the rent will go to closing costs if the tenant commits to buying the unit within six months, while 50 percent of the rent will go to toward closing costs if he or she decides to buy six to nine months after a lease is signed.
At the Decora, the rent-to-own program involves a 14-month lease, according to Justin Daly, the rental director for the Developers Group, the brokerage that represents the building.
Daly said the math works out so that rent on a Decora unit over 14 months equals 10 percent of the condo price — and all of the rent paid goes toward the down payment.
Decora's units start at $530,000, which means that a tenant who opts into the rent-to-own program at the building will have paid $53,000 over
14 months.
"Most people looking to do this want to buy," said Daly. "Otherwise, you're going to waste your money on a very high rent. It's an installment plan, and we think it appeals to people just out of grad or medical school who don't have enough savings to buy otherwise."
Elsewhere in Brooklyn, the Clarett Group is considering instating a rent-to-own program at the Forté, a 108-unit condominium building that is about one-third sold.
"It's interesting, because it's like a forced savings," said David Perry, the Clarett Group's director of sales.
Perry said Clarett is entertaining a program that would involve a renter deciding after six months whether to exercise their option to buy. From a developer's perspective, he said, there's not much risk involved with the program.
"The only potential risk I see is getting someone in the building who is basically renting there and is not a real purchaser," said Perry. "If that happens, you have to clean up the unit after they vacate and make it new again. But on the other hand, the rent they've paid can help pay for those costs."
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