Lease-to-own agreements are blowing up

The model offers an alternative to traditional homeownership, but it has some downsides.

In the next Mission: Impossible movie, Ethan Hunt should try buying a house.

Home prices rose faster than ever in 2021, mortgage rates are the highest they’ve been since 2008, and limited supply means buyers are scrambling for whatever they can get.

But an alternative option that gives buyers another path to homeownership is gaining steam, per Protocol.

Lease-to-own…

… is a model that allows customers to make a monthly lease payment, with a portion of it going toward owning the property.

  • After a certain time period, they can either buy the property outright, or continue with monthly payments.

The movement is powered by fintech startups like Divvy, Verbhouse, and ZeroDown, which buy homes in cash and rent them to customers using lease-to-own agreements.

Here’s how it works

With Divvy, a typical agreement:

  • Requires 1%-2% of the home price upfront, which goes toward the down payment if the renters decide to buy
  • Charges a monthly rental fee, plus a home savings fee (i.e. your down payment savings account)
  • Locks in a future purchase price; however, renters can pass on buying and walk away with home savings funds

Divvy’s program is designed for renters to become “mortgage-eligible in three years,” according to the company’s website.

But rent-to-own agreements are controversial

They have a history of being predatory and targeting low-income Black and brown homebuyers.

Critics point out other downsides as well:

  • Rent-to-own encourages companies to shell out cash and compete with humans for limited housing stock
  • Locked-in home prices could be bad for buyers if the market drops
  • There’s no guarantee renters will qualify for a mortgage once their lease term is up

For its part, Divvy says roughly half of its customers are able to buy their homes. But the market likely wouldn’t be as competitive if these companies weren’t scooping up homes in the first place.

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