Do alternative forms of homeownership, such as shared equity models and rent-to-own programs, present viable alternatives for future homeownership? Can they be taken to scale in a way that can encourage stabilization of neighborhoods and housing markets?
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Seven years after Hurricane Katrina, thousands of homes in New Orleans are still unoccupied, costing the government money and representing negative assets in their communities. Soon they will have to be demolished, if only to protect the city. With upwards of three million homes nationwide in some aspect of foreclosure, and unoccupied, we have a massive deadweight on our communities and on the economy. Yet we cannot simply fling people back into homeownership – both their credit scores and their psyches are scarred – so we need new forms of occupancy that don’t take capital outlays and don’t raise occupancy costs and yet do motivate the occupants to protect the property as if they were homeowners.
We can do this if we tease apart the six distinctive benefits of homeownership – security of tenure, controllable occupancy cost, improvability of the physical structure, the right to sell at any time, financeability of equity buildup, and unlimited appreciation. Though people tend to see these as all of a piece, in fact it’s the first three that matter most. Give someone a place from which he cannot be evicted, that he knows he can afford, and that he can improve for the future, and he is likely to defend it and invest in it as if he had the rest. As demonstrated in the United Kingdom, this can be achieved through properly structured rent-to-own (shared appreciation doesn’t work anywhere nearly as easily or well), with these key elements:
- From the beginning, the occupant thinks of him or herself as a future homeowner, with a right to buy at stated future intervals at some formula-based price the occupant believes will one day be within reach.
- The occupant pays an occupancy cost that’s at normal rent or maybe a smidgen higher, with any premium element being explicitly labeled a deposit toward an eventual down payment. Ideally, the deposit will earn interest, and then if later used as a down payment, will be matched (say 1-for-1) by the home seller. (If the occupant moves out without buying, the accumulated balance is paid out just like a savings account.)
- From the first day of move-in, the occupant is responsible for house management, upkeep and basic maintenance. We redefine the tenure so it feels like homeownership, with the attendant duties.
I’ve written about these elements at length in Recap’s State of the Market, Revising the Foreclosure Inventory, January 2012. Email [email protected] and I’ll send you a copy.
David A. Smith is the founder and chairman of Recap Real Estate Advisors.
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