Rent-to-Ow!

Bait and Switch

Insider quoted me in Private Equity Sold Them a Dream of Home Ownership. They Got Evicted Instead. It reads, in part,

Erica Hines-Denson had no idea how bad the odds against her were.

Student loans and a recent divorce had dinged her credit score. But she and her new husband, Elquinton Denson, were building a blended family and they dreamed of buying a home in the greater Atlanta area. After lenders turned them down for a traditional mortgage, a realtor told her there might be another way. Something called a lease-purchase, or rent-to-own, agreement.

“This was our way to own a home finally,” Hines-Denson said. “It was like we found a loophole.”

It took just a weekend of house hunting to find a house they loved: a stately four-bedroom, 30 miles southeast of Atlanta, with a built-in bar in the basement where they pictured hosting family and friends. Listed at $275,000, it was in their price range.

There was a catch. The couple wouldn’t be buying. Instead, a Chicago-based company called Home Partners of America would make a cash offer and rent the house back to them, with an option to buy within five years.

Home Partners supplied a lengthy agreement detailing the terms, including built-in annual increases to their rent and to the eventual purchase price. The document was more than 50 pages long; Hines-Denson said the company gave them just 24 hours to review it and sign. But the opportunity seemed too good to pass up. “You’re like, ‘Oh Lord, this is my chance,'” she said. “So you’re moving quick.”

The deal quickly turned sour. The company locked her out of the online payment portal after she missed a single month’s rent, adding hefty fees that made it impossible to catch up. After she missed a second month, the company swiftly filed for an eviction.

While a judge stayed her legal case under the federal COVID-19 eviction moratorium, the company’s management agency continued to call, Hines-Denson said, threatening to remove her belongings. In a final insult, the company kept their two-month security deposit when she and her family finally moved out.

Private Equity Moves In

Home Partners, which launched in 2012, now owns more than 28,000 homes nationwide. It is the largest of a handful of new companies promising “a clear path to homeownership” for families not yet ready or able to buy.

The company’s success has inspired startup competitors such as the New York-based company Landis, which boasts of investments from entertainers Will Smith and Jay-Z. Once dominated by fly-by-night operators, rent-to-own is now attracting some of the biggest players from Wall Street and Silicon Valley. Andreessen Horowitz led a Series A funding round for a rent-to-own competitor, Divvy Homes, in 2018. BlackRock and KKR purchased a majority stake in Home Partners by 2014, before private-equity giant Blackstone Group bought the company in 2021 for $6 billion.

In its marketing, Home Partners emphasizes that it offers “flexibility, choice and transparency,” providing the opportunity to “rent your dream home” without making a long-term commitment. “Home Partners has created a path to home ownership for tens of thousands of people who may not otherwise have had one,” a company spokesperson told Insider. “We are tremendously proud of our business.”

Yet Home Partners tenants, in interviews and court documents, say they got stuck in barely livable dwellings, with leaking sewage, broken air conditioners, filthy carpets, or nonworking electrical outlets. They describe being blocked from seeing home-inspection reports and facing swift eviction filings for a single late payment. One tenant filed a lawsuit claiming she suffered injuries when the ceiling of her home collapsed.

Hines-Denson said she felt like she’d been “set up to fail.”

More than 4,000 Home Partners tenants have purchased their homes over the past decade, according to a July 2022 paper from Moody’s Analytics, coauthored by an advisor to the company. But over the same time, nearly four times as many tenants — roughly 15,000 — moved out without buying.

An analysis of contracts and sales and eviction data shows that rent-to-own tenants are often left with the worst of all worlds. They have to shoulder many of the costs and responsibilities of homeownership, and the financial odds are stacked against them to end up as owners. Meanwhile, many are paying above-market rent.

“I’m very sympathetic when someone says they’ve identified a large segment of the population not being served by the current housing and mortgage landscape,” said David Reiss, the research director for the Center for Urban Business Entrepreneurship at Brooklyn Law School.

“What you don’t want to hear next is, ‘Therefore, we can do whatever we want to them.'”

*.     *.     *

“Rent-to-own has this really sordid history,” said Reiss. “It’s an area of the housing market that remains underregulated. That’s part of the attraction for many operators.” 

Contract Selling Is Back, Big-Time

The Chicago Reader quoted me in The Infamous Practice of Contract Selling Is Back in Chicago. It reads, in part,

When Carolyn Smith saw a for sale sign go up on her block one evening in the fall of 2011, it felt serendipitous. The now 68-year-old was anxiously looking for a new place to live. The landlord of her four-unit apartment building in the city’s Austin neighborhood was in foreclosure and had stopped paying the water bill. That month, she and the other tenants had finally scraped together the money themselves to prevent a shutoff and were planning to withhold rent until the landlord paid them back. Exhausted with this process and tired of dealing with “slumlords,” Smith wanted to buy a home in the neighborhood to ensure that she, her mother, Gwendolyn, and their dog, Sugar Baby, would have a stable place to live. But due to a past bankruptcy, Smith thought she would never be able to get a mortgage. So when she saw a house on her street for sale with a sign that said “owner financing,” she was excited. The next morning, she called the number listed and learned that the down payment was just $900—a sum she could fathom paying. “I figured I was blessed,” she says.

Her good fortune continued. A man on the other end of the line told her she was the very first one to inquire. The seller, South Carolina-based National Asset Advisors, called her several more times and mailed her paperwork to sign. Smith says she never met in person with anyone from National Asset Advisors or Harbour Portfolio Advisors, the Texas-based company that owned the home. But she says the agents she spoke with assured her that her credit was good enough for the transaction, despite the past bankruptcy. Next, they gave her a key code that allowed her to go in and look at the house, explaining that she’d be purchasing it “as is.” Smith thought the two-flat looked like a fixer-upper—the door had been damaged in an apparent break-in, and there was no hot-water heater, furnace, or kitchen sink—but given her poor luck with apartments of late, she felt she couldn’t pass up the chance to own a home. Both she and her mother, now 84, had been renting their whole lives; after pulling together the down payment, they beamed with pride when, in December 2011, they received a letter from National Asset Advisors that read “Congratulations on your purchase of your new home!”

But within a year, Smith discovered that the house was in even worse shape than she’d realized. In her first months in her new home, Smith estimates that she spent more than $4,000 just to get the heat and running water working properly, drinking bottled water in the meantime. Then the chimney started to crumble. Smith would hear the periodic thud of stray bricks tumbling into the alleyway as she sat in her living room or lay in bed at night; she began to worry that a passerby would be hit in the head and soon spent another $2,000 to replace the chimney. Public records show that the house had sat vacant earlier that year, and the city had ordered its previous owners to make extensive repairs.

Had Smith approached a bank for a mortgage, she likely would’ve received a Federal Housing Administration-issued form advising her to get a home inspection before buying. But as far as she recalls, no one she spoke to ever suggested one, and in her rush to get out of her old apartment, she didn’t think to insist.

The documents Smith signed with Harbour and National Asset Advisors required her to bring the property into habitable condition within four months, and with all the unexpected expenses, she soon fell behind on her monthly payments of $545.

Smith’s retirement from her job as an adult educator at Malcolm X College, in the spring of 2013, compounded the financial strain. Living on a fixed income of what she estimates was around $1,100 a month in pension and social security payments, she fell further behind, and the stress mounted.

“When we got to be two months behind, they would call me every day,” she remembers.

National Asset Advisors also began sending her letters threatening to evict her. That’s when Smith had a heart-stopping realization: She hadn’t actually purchased her home at all. The document she had signed wasn’t a traditional mortgage, as she had believed, but a “contract for deed”—a type of seller-financed transaction under which buyers lack any equity in the property until they’ve paid for it in full. Since Smith didn’t actually have a deed to the house, or any of the rights typically afforded home owners, she and her mother could be thrown out without a foreclosure process, forfeiting the thousands of dollars they’d already spent to rehabilitate the home.

“I know people always say ‘buyer beware’ ” she acknowledges. “But I’d never had a mortgage before, and I feel like they took advantage of that.”

What felt like a private nightmare for Smith has been playing out nationwide in the wake of the housing market crash, as investment firms step in to fill a void left by banks, now focused on lending to wealthier borrowers with spotless credit histories. In a tight credit market, companies like Harbour, which has purchased roughly 7,000 homes nationwide since 2010, including at least 42 in Cook County, purport to offer another shot at home ownership for those who can’t get mortgages. Such practices are increasingly common in struggling cities hard hit by the housing crash. A February 2016 article in the New York Times titled “Market for Fixer-Uppers Traps Low-Income Buyers” examined Harbour’s contract-for-deed sales in Akron, Ohio, and Battle Creek, Michigan. The Detroit News has reported that in 2015 the number of homes sold through contract-for-deed agreements in the city exceeded those sold through traditional mortgages.

*     *     *

Contract-for-deed sales also offered an attractive loophole from the growing set of regulations on traditional mortgages following the financial crisis. “In the same way that you saw [subprime lenders like] Countrywide get really big in the late 1990s,” says David Reiss, research director of the Center for Urban Business Entrepreneurship at Brooklyn Law School, “one of the real attractions for the businesses operating in this space is that they are underregulated.”