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Lease-to-own makes a return

Two Midtown Miami

With banks tightening lending standards in a down market, some real estate developers and investors are taking a cue from the old-time real estate gurus and using the rent-to-own method to sell properties.

Midtown Equities, developers of Midtown Miami Condominiums, is currently offering the lease-to-own option for some of the units in its luxury project. Meanwhile, "motivated sellers" of single-family homes across South Florida are offering the option to buy, rent, or lease-to-own — whatever it takes to cover the property's carrying costs in a competitive landscape.

Here's how it works: A lease-option agreement usually spans one to two years. At the end of the lease, the tenant has the right to buy the property at a price that was agreed upon when the lease was signed. A lease-purchase agreement differs because the tenant is legally obligated to buy the property when the lease period concludes. Both options require a homeowner or developer to commit to selling the property, but only a lease-purchase agreement will lock in a sale.

"As asking prices are going down, agreeing to a sale price today can help buffer sellers against any further market downturns," says Chuck Kovaleski, president of Attorneys' Title Insurance Fund, a title insurance underwriter and title information provider headquartered in Orlando, with branches in Miami, Fort Lauderdale and Palm Beach. "And, with a greater number of buyers considering a lease-purchase agreement, sellers can have a greater opportunity to ensure their property reaps top dollar."

The concept has been tried in down markets before, but is re-emerging in the current tailspin. Headlines in major cities like Chicago, Memphis and Newark speak of developers deploying lease-to-own options, especially on the condo front.

But will enough developers latch on to the concept to make rent-to-own a bona fide trend in South Florida? And, perhaps more importantly, will condo-buyers in the Magic City find wisdom in paying what amounts to a higher price for the option to secure the dream home for which they might not otherwise qualify?

Midtown Miami, a 4 million-square-foot mixed-use project under development in the heart of Miami, is a good place to find some answers. The project spans 56 acres located adjacent to downtown and Miami's famed arts and design district.

Midtown Equities is offering a rent-to-own program that lets buyers apply 100 percent of the first-year rent payments toward their purchase. At Two Midtown Miami, one of two completed buildings in the eight-tower complex, buyers can rent-to-own a one-bedroom for $1,500 a month or a two-bedroom for $1,900 a month.

Joe Cayre, chairman of Manhattan-based Midtown Equities, a real estate development and acquisition firm with a focus on major metropolitan cities, reports few takers on the rent-to-own program at Midtown Miami.

"Young professionals who want to buy are still buying. People who want to rent are still renting. Miami is a different market than Chicago or New Jersey," Cayre says. "Ultimately real estate is still about location, location, location. We're fortunate to be in a good position in a market that will rebound before our project is completed."

Although plenty of single-family home investors are pushing the rent-to-own option, real estate brokers and community leaders report there is less action on the condo side of the market. Condo developers who witness buyers walking away from their deposits are the most likely to put this plan in action, according to Samir Patel, owner of Miami Condo Realty, a boutique condo and loft sales brokerage. Otherwise, Patel says, the developers he works with would rather close the deal now than later.

"The rent that a buyer would pay on a lease-to-own deal typically doesn't cover the actual expense of the property. The developer is delayed in paying back its loan, so they are charging a price that is a little above market. When buyers see the numbers, most of them aren't jumping on the lease-to-own deal. Instead, they are renting and saving their money to buy into something nine months or a year from now."

Bruce Cutright, chairman of the Midtown Miami Community Development District and COO of RexMidtown Development, a New York City-based developer, agrees with Patel. He figures less than 20 percent of South Florida developers are taking the lease-to-own track. Despite the added cost to the developer, though, Cutright says it can work in some projects, such as Two Midtown Miami.

"Midtown Miami is a big development with thousands of units planned, so there's an intent to keep the interest and growth going strong," Cutright says. "But for a developer that just has one building and plenty of financial resources to wait out the market to come back, it doesn't make as much sense."

It's a different story, though, with single-family homes. Realtor magazine, the official publication of the National Association of Realtors, even posted a lease-to-own primer on its Web site. From the individual investor's and realtor's perspectives, rent-to-own opens up a much larger audience of potential buyers who may want to make the move into ownership while they are still wading through credit repair.

Richard Wright, principal at Krystal Real Estate Services in Pembroke Pines, says single-family lease-to-own is running in high gear because sellers are simply desperate. "People can't sell their homes. Rather than go through a foreclosure or let the home sit vacant too long, they'll rent it out with an option for the renter to buy," says Wright, who offers a credit repair program that prepares buyers to qualify for a loan when the lease term expires.

Wright keeps a list of lease-to-own properties available in Broward. Last year, there was an average of 125 properties on his list at any given time. In February, there were more than 1,500, including all property types and price ranges.

Lease-to-own has become a profitable niche for this realtor in a turbulent market. "While many realtors are starving out there or going out of business," he says, "we're expanding."