Watch: Why Wall Street loves this controversial path to homeownership

Updated, Feb 25, 3:15 p.m: If you had to pick one phrase at the center of the American dream, it would be “homeownership.” The white picket fence symbolizes the ideal suburban life and evokes the image of having made it.

The reality today, however, is that owning a home is out of reach for most Americans. Rising home prices and increasing affordability issues coupled with stagnant wages means that many would-be buyers are forced to remain in the rental market — and landlords are reaping the rewards.

But a fast-growing — and highly controversial — offering wants to bridge the gap. It’s called rent-to-own. In this latest episode of Paydirt, The Real Deal‘s Hiten Samtani breaks down the growth of the sector, how it works, identifies the key players in the space and highlights the concerns with the model.

Rent-to-own refers to giving renters the option to purchase a property they are renting for a fixed price, provided they can come up with the money in an agreed-upon time period — typically three to five years.

The sale price is locked in at the start of the lease, and some companies offer renters a discount for buying early. Renters typically shoulder the costs of maintenance and upgrades. It’s billed as a path to homeownership for those shut out of the mortgage market, and it’s something VC firms are all over.

Watch more from Paydirt — Short Breakdowns of the Biggest Real Estate Trends:

• The Landscape for Construction Tech in 2022
• Last Mile-High Club: Drivers of industrial real estate’s boom
• Single-Family Rentals: The Hottest Sector In The Real Estate Market

Take Divvy, which raised $200 million over the summer at a $2 billion valuation from the likes of Tiger Global Management, Caffeinated Capital and Andreessen Horowitz. Just six months earlier, the company had raised money at one-fourth of that valuation, which tells you something about their growth and how excited investors are about the business. Then there’s Landis, which raised $165 million last year from Sequoia, as well as Will Smith and Jay-Z.

But by far the biggest player in the space is Home Partners of America, owner of 17,000 homes across the U.S. It’s now owned by Blackstone, which bought the company last summer for $6 billion, but it was the brainchild of Lew Ranieri.

Yes, that Lew Ranieri, inventor of the mortgage-backed security, the instrument whose misuse set off the housing market’s collapse in 2008.

“The assertion that Home Partners is charging above market rents is inaccurate and misleading,” the company said in a statement after publication. “Over the past year, new market rate leases executed for homes that rent-to-purchase residents recently left were on average 5.7 percent higher than the prior lease purchase rental rates – providing clear evidence that our average lease purchase rental rate is at or below market at the time of lease expiration.” The company added that its platform is “enabling families that would otherwise be locked out of traditional single-family housing to access homes with transparency, optionality and flexibility at every stage of the resident-led process.”

Clearly, Wall Street and Silicon Valley see huge riches in store for this market. But will it work out well for the aspiring homeowners? Or will their American dreams become the latest housing nightmare?

Watch the video above for a quick breakdown, and follow The Real Deal on YouTube and Instagram for more Paydirt breakdowns.

This story was updated to include a statement from Home Partners of America.