WHEN sales began almost two years ago at the first Northside Piers tower in Williamsburg, Brooklyn, buyers snapped up more than 20 percent of the 180 luxury condominiums in the first two months. They may have been drawn by the sweeping East River vistas and myriad amenities like valet parking and rooftop cabanas.
But then came the credit crisis and the meltdown on Wall Street. Sales traffic inside the 29-story glass building began to slow down, and today about a third of the condos remain unsold.
Faced with the prospect of empty units and static cash flow, just as sales were starting on an even larger sister tower — Two Northside Piers — the developer, Toll Brothers, decided to take a different approach and expand a program used elsewhere in the country that allows prospective owners to lease with the option to buy, using part of the rent toward the purchase.
Rent-to-own options, which come in many variations, have become increasingly common for developers in areas where home foreclosures are high, like Nevada, California and Florida. In most cases, the accumulated rent is used to lower the purchase price or to reduce closing costs. (Fannie Mae and Freddie Mac guidelines generally preclude using rent money toward the down payment, mortgage experts say, because buyers need to prove that they can save on their own and thus qualify for a loan.)
Prospective buyers at Northside Piers tower are essentially able to try out certain one- to three-bedroom apartments. If they like what they see, they can purchase them later on. Or, once the lease is up, they can simply walk away.
“It’s really experimental, but all indications so far are good,” said David Von Spreckelsen, a senior vice president of Toll Brothers City Living, a division of Toll Brothers. Two families have signed up for the rent-to-own program since it began this fall, he said.
In the last several months, as residential sales have softened in the city and throughout the region, other developments (many in parts of Brooklyn that are rife with new construction), have been offering similar deals, as have a smattering of motivated individual sellers. Some are finding help through Web sites devoted to such listings, like iRentToOwn.com — which, according to its founder, John Kobs, has had 4.4 million page views since its inception a year ago.
At the same time, real estate brokers have been revamping their approaches to marketing hard-to-move property to include renting with an option to buy (a k a lease purchase or lease option).
Fliers and promotional material inviting people to “test drive” homes and neighborhoods can be found on buildings in Manhattan, including Sutton Manor on East 53rd Street, 99 John Street, the Revere on East 54th Street and Morgan Court on Madison Avenue. In Brooklyn, the BridgeView Tower and the Decora are among those with this option, in addition to Northside Piers. Both sale prices and rents are often included in the listings.
The rent-to-own concept represents “a change in mind-set” during these tough economic times, said Jonathan J. Miller, a founder and the president of the Miller Samuel real estate appraisal firm. “The longer this drags out, the more
acceptable this option becomes; this is just evolving,” he said.
The last time lease-purchase options were seen with any frequency in the New York area was in the late ’80s and early ’90s — a time when market conditions may have been even more dire than they are now, according to veteran real estate professionals, and certainly a time when interest rates were a lot higher.
“That period of time was a very severe downturn,” Mr. Miller said. “The market had about seven years of surplus inventory to be absorbed. In the period we’re in now, we have 7.9 months of inventory. We’re clearly going into a weak economic period but going into it with relative strength.”
Klara Madlin, the owner of Klara Madlin Real Estate in Manhattan, offered similar observations, and recalled handling a few lease-purchase deals in those dicey decades.
How many of these lessees ultimately bought their apartments back then? “I would say maybe 5 percent — not a lot,” Ms. Madlin said, noting that hard numbers are difficult to come by. Conversion rates were low, she said, “because the people generally who were renting to buy couldn’t really afford to buy.”
“I think it might be different this time around,” she said.
Renting to own can be attractive for both sides of a real estate transaction. It brings cash flow to properties that otherwise might be stagnant. And buyers lacking adequate down payments (perhaps because of stock losses), struggling with poor credit, or even recovering from a recent foreclosure, can build up savings and rebuild creditworthiness in order to get a mortgage.
For Simon Hall, a 40-year-old technology specialist from Britain, it is a means of establishing a credit history in this country and paving the path to eventual homeownership for himself and his American girlfriend, Vishma Victor, 28.
“Even though I have excellent credit in the U.K., it makes no difference in the U.S.,” Mr. Hall said, adding that “eventually I will have rental history and utility bill history. ”