Living in San Francisco, where the average home price is $1.3 million, Adena Hefets knows how hard it can be for young people to get a mortgage.
"I kept looking at the rate of homeownership and thinking, my generation is not going to be able to buy a home,'' said Hefets, 33. "I can’t change the mortgage industry but I could let people buy into the equity of a home.''
Hefets is CEO and co-founder of Divvy, a company that lets renters pick out a house and have part of their rent applied toward a downpayment. In a few years, they’ll have saved enough to buy the home, or so the idea goes.
Divvy entered the Tampa Bay market this month, joining a rent-to-own field that includes Home Partners of America. The two companies differ in significant ways but both say they are trying to help would-be buyers at a time when prices have shot up much more than wages in Tampa Bay and many other metro areas.
The path to homeownership has been especially rough for millennials, those 22 to 37. Often burdened with student loan debt and rising apartment rents, many millennials can’t save enough for downpayments. Compared with prior generations in the same age range, the millennial home ownership rate is 8 to 9 percentage points lower, an Urban Institute study found.
Divvy works like this: With the company’s help, a renter picks out a house that Divvy buys for cash. The renter puts down 2 percent of the purchase price and a growing percentage of the rent goes toward equity each month — 2. 1 percent the first month, 2.2 percent the second month and so on up to 10 percent over three years.
"At that time, we have a buyout and apply 10 percent as a downpayment or they can walk away and we’ll cash them out,'' Hefets said.. The purchase price would be about 10 percent more than what Divvy paid.
Here’s the catch: If you don’t buy the house, you’re still obligated to lease it for the full three years. If you stop making payments, Divvy will refund just half of your accumulated savings. That means you could be out several thousand dollars.
Founded two years ago in San Francisco, Divvy has raised nearly $200 million from backers that include Lennar, the nation’s largest homebuilder. Hefets said the company has received thousands of applications and put "hundreds'' of people in homes although she would not give any specific figures.
Divvy started in Cleveland and Atlanta, then went to Memphis. Before expanding this month to Tampa Bay, Dallas and St. Louis, the company compared housing markets nationwide on such factors as employment, home affordability and the ratio of renters to homeowners.
"We narrowed it down to about 15 markets, and we went to every single market,'' Hefets said. "I really love Tampa, and we spent a lot of time in the St. Pete area.''
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Among Tampa Bay’s attractions were its 3.3 percent unemployment rate, lower than the national average, and a "significant amount'' of well-maintained houses that would pass Divvy inspections. The company identified about 6,000 houses that fall within its $100,000 to $300,000 price range although Hefets acknowledged that most houses the company buys will be closer to the top of the range.
Divvy evaluates applicants individually but generally requires a credit score above 550 and no bankruptcies or evictions within the past 12 month. Most applicant have scores above 635, make between $60,000 and $80,000 a year and already have $4,000 saved up.
If a renter has that much, wouldn’t it be better to take advantage of one of the many government downpayment assistance programs for first-time buyers and go ahead and buy a house instead of waiting until prices go up even more?
"If you can get a mortgage with downpayment assistance, mortgages will always be the cheaper option,'' Hefets said. But, she adds, many sellers don’t like to deal with buyers using government help.
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Rent-to-own programs have been around for decades, including ones that prey on low-income buyers who can’t get traditional financing. Among the most controversial are contracts-for-deed in which the seller retains legal title to the property until the full amount is paid; only then does the buyer get title. Federal regulators have started to investigate companies that hold buyers responsible for everything — repairs, taxes and insurance — and kick them out if they fall behind regardless of how many payments they’ve made.
In buying houses they rent to potential buyers, Divvy and Home Partners of America are banking on a business model geared toward people with steady incomes who at this point in their lives can’t quite afford to buy or don’t want to commit to home ownership. Such rent-to-own programs especially appeal to newcomers who want to "try out'' an area before buying. Home Partners’s experience in the Tampa Bay area, however, suggests that the rent-to-own market is still fairly limited.
The Chicago-based company began buying Tampa Bay houses in 2015 and said it has rented to 838 families locally. Of those, 39 have bought the houses, the company says. A search of county records, though, shows just seven houses sold in Hillsborough, one in Pinellas and none in Hernando and Pasco counties.
"We certainly want to grow it,'' Michael Grossman, a Home Partners spokesperson, said of the the market. "It’s an evolution rather than a revolution.''
After you select a house, Home Partners buys it and rents it to you at market rates with increases capped at 3.7 percent a year. You can buy the house at anytime within five years, paying a price that reflects a 5 percent annual increase.
The major difference between Divvy and Home Partners is that people renting from Home Partners aren’t building up any equity. They can, however, move without penalty when their year’s lease is up.
"We want to make sure our residents aren’t penalized if they can’t buy their home,'' Grossman said.