In 2007, Dean Baker proposed an idea he called “own to rent“, in which homeowners facing foreclosure would be given the option of staying in their home indefinitely, provided they paid market rent. The notion was that stressed families would be spared the cost and disruption of moving if they were indeed viable renters (a big deal for kids in school). It would also save the bank the cost of foreclosure and the expense of maintaining a home and readying it for sale.
Critics argued it was a terrible idea, that banks would come out worse, and that the former owners would make lousy tenant (it appears not to have occurred to them that the now-tenants probably have improvements they made, giving them more attachment to the house than a typical rental).
Well, this obviously stupid idea is taking place full bore in Phoenix, as entrepreneurs find owners facing foreclosure and offer to buy the home if they remain as tenants. That says the economics are at least tantamount to the banks offering the same deal directly. However, in fairness, investors look negatively at banks that carry a lot of REO (real estate owned) so a bank would have to do a great deal of investor education to operate a similar program (and imagine what it would take to get investors in a securitized vehicle to sign off on this approach). And the other reason an idea like this has attracted such a following in Phoenix is a unique combination of a particularly distressed real estate market and a big influx of investment funds. But if other markets continue to swoon,the Phoenix model may become common.
From the New York Times:
With this sweltering desert city enduring one of the largest tumbles in housing prices for any urban area since the Depression, there is an unrelenting stream of foreclosures to choose from. On some days, hundreds are offered for sale at the auctions that take place on the plaza in front of the county courthouse.
There is also a large supply of foreclosed families who can no longer qualify for a loan. And that is prompting a flood of investors like Mr.[Lou] Jarvis, who wants to turn as many of these people as possible into rent-paying tenants in the houses they used to own….
Absentee buyers, who can be either investors or individuals purchasing a vacation property, bought nearly 4 of every 10 homes sold in the Phoenix metropolitan area in April, according to the research firm MDA DataQuick. That is up 50 percent since late 2007, and is nearly the same ratio as at the 2005 peak.
Once again, just about everybody seems to be buying as many houses as they can, positive it will make them rich — or at least allow them to recoup some of their losses….
In January, Mr. Jarvis began working as director of investor relations for Brewer Caldwell, a property management firm that had been approached by the CBI Group, a real estate fund based in Calgary, Alberta. In its first foray into the American market, CBI is buying 175 rental houses in Phoenix.
One of them belonged to Mary Lou and Jorge Aguilar, who purchased it new for $111,000 in 1999. Three years ago, after a series of financial difficulties, they refinanced for $185,000 for reasons they no longer understand. “Our lender talked a pretty picture,” Mrs. Aguilar said bitterly.
When the couple’s mortgage payment adjusted to $1,242 a month, they fell behind and ended up in foreclosure. They now pay $1,014 in rent, which they say is bearable.
Still, their feelings are mixed. “It’s not our house anymore; it’s someone else’s,” said Mrs. Aguilar, who works for the state welfare department.
For CBI, the deal is sweet. At that rent, it would recoup the $52,000 it paid for the house in about five years. “This type of deal is absolutely not available in Canada,” said Jarrett Zielinski, a CBI executive. “No city here has fallen by 50 percent, the way Phoenix has.”
However, there is a possible fly in the ointment:
Brewer Caldwell has bought about 125 houses this year for its clients. Only a quarter had owners who were living there already and willing to stay on as tenants. Filling up the rest, and all the other houses the company intends to buy, will depend on a steady supply of people who cannot afford to buy for themselves.
“If Phoenix loses population,” Mr. Jarvis says, “then buying houses here is a bad bet.”
Phoenix is geographically dispersed and requires heavy duty air conditioning for a chunk of the year. Will the city lose appeal when energy prices rise?
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Yves, I think that you might have read too much into the article.
The investors are buying houses from those facing foreclosure or who in fact have been foreclosed upon and offering to rent back the property to them if they are interested. They are not predicating their purchase on the occupant continuing as a renter. I can assure you that they are not walking from these houses if the occupant chooses not to remain.
As for the Phoenix model, it is not quite as benevolent as you might think. I can’t speak to the assertion in the article that the owners are counseling the current tenants in order to groom them for a purchase of the property down the road. I can speak to some fairly questionable activities that are going on in this sphere. It has been a common practice (scam) in this town and elsewhere to entice tenants into lease/purchase agreements that require a substantial upfront payment. A portion of the lease payments are supposedly dedicated to the down payment. Normally, the upfront payment is to be applied as a deduction of the purchase price.
Here’s the con. In order for the lease payments to be applied to the down payment they must exceed the fair market rent for the property. In other words if you pay $1200 for a house that would normally rent for $1000 then $200 per month will apply to your down payment. The catch? You have to document up front that the lease is above market. This is almost never done and of course most borrowers don’t know about this little catch. Bottom line, you submit your loan to an underwriter and he or she says no way, the rent was not above market.
It doesn’t end there. The upfront payment that’s supposed to be used to reduce the purchase price is all well and good. The problem is that loans are approved on the basis of the lower of cost or appraisal. So assume your lease/purchaser has decided to go ahead and buy the house. He has cleaned up his credit, has a new job and the right ratios and after the appraisal it’s agreed between both parties that the property is worth $100,000. He gave you $5,000 upfront with the agreement it would be applied to the purchase price. So the purchase price is now $95,000. All well and good but remember the loan underwriter is now going to look at the transaction and say the relevant transaction amount is now $95,000 and I need to see a down payment of x% on that amount.
Notice that the upfront payment is never structured to be a down payment. The only way to do that is for the investor to cough up the money at the time of exercise of the agreement and they aren’t structured in that manner.
The sad truth is that most of these deals never work out. For the tenant/buyer that is. They work out for the seller/lessor because they’re structured never to close.
Wow, I didn’t mean to go on like this. I hope it makes sense. The bottom line is that sometimes these deals are legit but most of the time they don’t and serve mostly to line the pockets of the lessor. Too often it amounts to nothing more than a scheme to sell an over priced house to an unqualified borrower. Not a recipe for
Since the concept “Phoenix” is existentially insane and must be the one of the first sprawl plains wiped out by resource depletion, when I look at this kind of speculation and rent pattern I’m not sure whether to see it as indicative of the future for suburbia everywhere or just an outlier.
Phoenix is already too hot for a quarter of the year, and only getting hotter. That’s why its population will be under pressure.
The day I want to go long homes in the DESERT is the day I’ve clearly got heat stroke.
This may be viable for low tax areas like Phoenix, but I doubt it would work in high property tax places (much of the northeast, big cities, etc.) because those taxes would eat into the profit margins of the property owners.
That said, it someone offered me a reduced “rent” that also meant I didn’t have to pay for major upkeep or taxes, I’d take them up on it.
Homeownership is not what it is cracked up to be. If there is no conceivable payoff at the end of the road, it is hard to justify the hassle and expense. This is starting to dawn on millions of us. We’re a bit slow on the uptake.
Water?
butts in houses………..
only plan for all the government foreclosures that we the taxpayer now own will be to rent to own,
show a paystub and you have a 30-40 year loan WITH A BIG FAT FEE FINANCED ON THE TOP
the government is swimming in foreclosure supply,
they now OR SHORTLY will own all the bad debt of the banks WHICH MEANS FORECLOSURES
butts in houses………..
Homes under $100k in Phoenix sell faster than you can believe – my bro is trying to buy one right now, anything that wasn’t stripped by the former “owners” is snapped up in a few days.
As to this notion that the former “owners” might have improved the property, based on my experiences in actually looking at these homes, it’s hogwash. 10 yr old homes have 10 yr old fixtures and appliances. 30 yr old homes look 40 yrs old inside.
During the bubble, you didn’t have to improve your home to sell it, now, the banks refuse to make even minor repairs.
Once in a while you encounter a half-done flip, but those aren’t usually eligible for financing because of missing fixtures.
As to these out-of-town specuvestors, I suspect they’ll get their butts handed to them. Meth/grow/drop houses are all over town, even the locals get fooled – In fact, I believe our own “pink underpants” sheriff had a drop house next door. An out-of-towner doesn’t stand a chance…
The thing that really concerns me, is that the foreclosures are cleaned up by outside crews without the bank ever looking at them. You never know if a given house was a “cooker”, because all of the the evidence is taken away by low-wage, untrained cleaning crews.
Since meth houses are highly toxic, I suspect a wave of articles on people buying bank-owned homes and finding out later that the places are killing them.
Don’t look to the NT Times for accurate reporting on the housing situation in Phoenix. And the local rag, the Republic, is just as bad.
At the risk of repeating what Mark states above, cheap houses are selling like hotcakes. But you really need to see some of these beauties to really appreciate how stupid these investors are. It’s just the next wave of knifecatchers about to get neutered. There is no “Phoenix Model.”
This is a case of more money than brains for the investors. The company is based in Calgary, which will likely be the least recession-affected city in Canada due to the petro-dollar economy.
The specu-vestor trend started in Vancouver and Calgary, then when the big gains were made (2006 or so), the action moved to Edmonton, Red Deer, then eventually Saskatoon and Regina (2008, late to the party).
There were investment groups that ordered houses by tranches – $4M of SFH for instance, never even meeting the realtor let alone seeing the houses. People in Calgary still have money, still think their houses are worth what they sold for last year, and still refuse to believe RE could be dead money for any length of time. These are the originators of the Phoenix model.
Water may be the issue for Phoenix, but energy prices will not be. Air conditioning in the summer is comparatively cheap; generating heat in cold climates is a more expensive proposition.
Tenants should NEVER get into lease options (purchase plans where tenants agree to pay a large deposit and additional monthly rent on the expectation that they’ll buy the house at some point in the future). In California many landlords in immediate danger of foreclosure are offering lease options and then allowing the property to go into foreclosure. The tenant is, how can I put this, ripped off.