Buy into a rent-to-own program: faced with losing residents to homeownership, some property management companies offer rent-to-own incentive programs with the hope of retaining existing residents a little longer and while luring prospects.

Former apartment resident Damian Edwards sounds like a salesman when he talks about rent-to-own programs--at least when it involves the one he participated in last year while living in a community in Maitland, Fla., owned by Trammell Crow Residential (photos above and right). The program helped land him in a pre-owned home located in Winter Park, Fla., just outside Orlando, priced at more than $200,000.

Edwards, 63, moved into his new home in June 2002 after living one year in an apartment. As a resident of Alexan at Maitland Crossing, Edwards automatically became enrolled in Trammell (Crow Residential Service's rent-to-own program called "H.E.L.P. (Home Equity Leasing Program) in Florida."

Faced with losing residents to homeownership, some of the nation's top property management companies are offering rent-to-own incentive programs, such as the program TCRS offers, with the hope of retaining existing residents a little longer while also luring prospects.

Current economic conditions seem to favor the development of such programs and the continuing evolution of existing ones. The decline in home mortgage rates, spurring growth in home sales and enabling more people to enter housing markets because of sub-prime lending and other financing techniques, are part of the reason for rising vacancy rates in multifamily housing across the country.

The programs, often created through partnerships of property management companies with real estate brokers, mortgage brokers and home building companies, basically offer a "savings plan" method for the resident. The multifamily housing companies then make a payment from the commission on the purchase contract. The lender decides how the money will be applied. Some have restrictions on closing costs and require that it is a dollar-for-dollar reduction in the purchase price. (See sidebar "How Does it Work" on page 51 for details.)

Clearly, multifamily property owners and managers behind these efforts want to leverage current economic realities, both good. and bad. Indeed, they said, their programs were designed for two reasons: First, to convince consumers to move into their apartment homes rather than into another company's; and, for the duration, to earn additional savings--as residents stay longer because they are part of the programs.

Rick Conner, Assistant Vice President of Strategic Business Development at Equity, said one community owned by Chicago based Equity Residential, described the program as "probably our number-one leasing tool." For TCRS, residents participating in the program live in an apartment community nine months longer on average. TCRS and Equity find the program more worthwhile than simply letting a resident live rent-free for one month, a common resident recruiting concession.

Tyler Lenz Kemmer, Vice President of Ancillary Services at BRE Properties in Phoenix, said, "This is an extremely effective marketing and sales tool that helps sell leases.... This as an alternative to giving away one free month of rent. If the resident's ultimate goal is to own a home, this helps them and it might be more helpful than offering a discount on one month's worth of rent up front."

Equity also realizes the benefit of providing an incentive for residents to stay a few months longer in their communities.

"Unfortunately, 70 percent of our residents move out every single year," said Conner. "At the same time, our evidence shows that our residents who are enrolled in the program stay an average of an additional eight months. That's why our program is very robust. If we didn't believe in the program we wouldn't stay with it. We use this as a program of differentiation, particularly when rental rates are stagnant. It sets us apart from the competition."

Equity also has seen advantages in markets with a lot of new home construction. Builders and real estate agents often offer larger referral fees to multifamily housing companies when residents purchase new homes rather than pre-existing homes. Conner explained that 35 percent of residents who move out of Equity's property in a single year will purchase a new home. "As a result, we have at least 55,000 potential home buyers who move out every year," he said, which makes 55,000 potential participants for the rent-to-own program.

Jennifer Buchanan, Vice President of Business Development at TCRS in Charlotte, N.C., said that from the program's conception her company recognized that home purchasing residents were attracted to TCRS communities.

"Ever conscious of their credit health to qualify for a mortgage, this profile has good payment history and tends to take care of the property," she said. "With the HELPAmerica Buy Homes program, we are able to further attract this profile and offer a meaningful amenity not offered by many of our competitors. As mortgage rates have continued to fall and consumers have heightened awareness to home purchase, the HELPAmerica Buy Homes amenity has become more valuable as a leasing tool.

TCRS decided to turn a reason for residents to move out into a reason to move in.

Buchanan calls the program "a great marketing tool. You have situations where, all things being equal, if you have two Class A communities sitting side by side, it [the home-buying credit] can be a deciding factor. And in fact we used to track this in North Carolina, asking our residents if the program made a difference, and about 28 percent said it did."

Multifamily housing companies are not the only ones benefiting from rent-to-own programs.

"They're good for capturing residents, providing value to the resident after the lease is up and producing revenue for those apartment companies," said David Robinson, Managing Broker at Coldwell Banker in Winter Park, Fla. Coldwell Banker has been the only real estate broker working with Trammell Crow Residential Services-owned H.E.L.P. program in Orlando for a little more than two years.

Coldwell Banker operates the resale portion of the H.E.L.P. Program.

"Our business has increased steadily during the past year," said Robinson, who estimated that as of May 2003 Coldwell Banker had sold 100 homes to H.E.L.P. customers He added that residents are seeing the benefit of the rent-to-own programs, too, because they give residents something to show their time and money spent in a multifamily community. "Trammell Crow Residential Services' program provides a valuable service to residents," said Robinson.

Miami-based builder Lennar Homes also is affiliated with H.E.L.P Realty. Cheri Bass, Director of Sales, sells approximately 30 homes annually through H.E.L.P. Realty.

"Our customers are just thrilled," she said. "This program provides a transition for people who want to own homes eventually but aren't able to now. In the meantime, however, they build toward it by getting credit from the program."

There are approximately one dozen rent-to-own programs currently operating, the first was launched in 1989 by Trammell Crow Residential Services Florida Division. Others include San Francisco-based BRE Properties, a real estate investment trust, which promotes HOME (Home Ownership Made Easy); Summit Properties in Charlotte, N.C.; which operates "The Home Program (www.thehomeprogram.com); Huntington Valley, Pa.-based Toll Brothers; Bozzuto in Greenbelt, Md.; Denver-based Simpson Property Group LP, which launched SAVE (Start Accruing Valuable Equity) in 2000; Village Green Properties in Farmington Hills, Mich., which put together an effort called "LeaseEquity" in 1998; and Albuquerque, New Mexico-based American Realcorp, which runs its "Future Homebuyers Club."

Renting to a Buyer

"We enjoyed the entire process with TCRS," said Edwards, who received a $2,000 credit for his time spent in the TCRS apartment. "The program's a no-brainer, particularly if you're part of a working couple like my wife and me."

Edwards was impressed with TCRS's assistance on his home purchase. "It's hard to find the time to look for the right place," he said. "Ninety percent of the time invested in making this happen was theirs; 10 percent ours. We said to ourselves, "Whoa, [TCRS] is making us feel welcome even though we're intending to move out.'"

William D. Spittel and his wife bought a brand-new $230,000 three-bedroom home in June 2002 in Celebration, Fla., just outside Kissimmee, Fla. Through TCRS's H.E.L.P. program, they received a $4,000 credit.

"We haven't been in touch with anyone to whom we could recommend TCRS's rent-to-own program, but if we knew anyone who might be moving in down here we would," Spittel, 60, said. The Spittels were satisfied with TCRS's program and the house they purchased, too.

Tim Green, 28, moved into a new $230,000 home in mid-February in Littleton, Colo., thanks in part to the $1,700 credit he received through the "Rent With Equity" program after living 11 months in an apartment owned by Equity Residential. Green and his wife had just moved from Madison, Wisc., and were experiencing sticker-shock at the price of comparable homes in Littleton. Renting gave the Greens an opportunity to get acclimated to the area before buying a home.

"We weren't necessarily planning on buying right away," he said. "We were just looking for something we could afford [rent-wise] with the possibility of buying something five or six years in the future."

Jim Stephen also relocated but he used a rent-to-own program to build credit. He moved from Canada to Colorado for work, signed a lease at BRE and joined its HOME program.

"We had wanted to buy a home from the beginning, but I had no credit whatsoever," said Stephen, 28. "They actually instituted the program after I'd been renting for one month and we were put in the program at no charge."

Stephen and his wife looked at homes outside the BRE Program, but ultimately went with a home that was part of the program so they could use their rent-to-own credit.

Resident Sarah Cancel, 32, and her husband rented an apartment for seven years from TCRS before buying a house in Clermont, Fla., for $106,000. She said they chose to rent to buy time to research the area better and get the best home deal possible. Ultimately, they bought a pre-owned home, which meant they didn't get the full credit from that rent-to-own program. Nonetheless, they were satisfied.

"We didn't earn a lot of credit--somewhere between $600 and $700--because the home we bought was used," Cancel said. "Sometimes, I wish we had received that entire 20 percent of credit for each month that we had been in the apartment, but when you have closing costs and everything else you have to buy because you live in a home rather than an apartment--things like lawnmowers--you are grateful anyway."

Taking a Wait-and-See Attitude

Despite the apparent benefits of a rent-to-own program, some issues associated with them have the majority of apartment community owners sitting on the sidelines as these programs evolve.

Rent-to-own programs force participants to think "outside the box" in terms of existing competitive pressures between those involved in apartment renting and leasing and those in home building, purchasing and financing.

Helping the Competition

Particularly challenging is the commonly held viewpoint that those in home building and home selling businesses are interested in "grabbing" current rental customers from those who build and own apartments; therefore, the apartment owners and management companies should not cooperate with them.

Apartment leasing professionals struggle, too, with the issue of whether they are "aiding and abetting" home builders and real estate brokers selling both new and "pre-owned" single-family housing.

Rick Carruthers, division president in the Orlando offices of Los Angeles-based KB Homes, which works with TCRS's H.E.L.P. Realty, said there are two schools of thought about these programs.

"In the first school," he said, "people ask, 'Why would TCRS want to make it easier for people to move out?' And the answer is that they're looking to differentiate their product so somebody will want to come and rent from them.

"The other school is simply, 'You're paying to make your customer not your customer.'

"In reality, companies such as TCRS are not differentiating themselves only against smaller companies, that aren't attempting to offer these programs. And, they are able to do so without spending a lot of money."

Real Estate Licensing and Compliance

Real estate licensing and related compliance issues also are a concern. Conceptually, these programs could work for smaller companies as long as they comply with applicable state real estate and other laws, according to Jay Harris, Vice President of Property Management for the Washington, D.C.-based National Apartment Association/National Multi Housing Council (NAA/NMHC) Joint Legislative Program.

"What is permitted in one area with a license may not be permitted in another," said Harris. "If residents say, 'We want to purchase a house,' the leasing manager, assistant manager or whoever is dealing with the residents, may need ot be licensed to refer someone to a particular builder."

Another key issue is explaining to real estate boards that these are marketing techniques rather than sales programs.

"It can be difficult in explaining to them that these are marketing programs, that we're not a party to the transaction and we're just sending them to the home builders," said Rick Conner, Assistant Vice President of Strategic Business Development, Equity Residential.

Program Development

Establishing the program takes time and manpower. Many companies do not want to devote either. Harris said a company must have a corporate staff capable of putting the program together.

"As start-up efforts, you must structure relationships with the builders--that means striking a deal with them," he said. "And there are a wide variety of other needs, such as getting your own leasing agents on board."

At Equity Residential, three full-time corporate executives manage and monitor the rent-to-own program.

Rob Bishop, Vice President of Asset Management for Summit Property, said, "These are highly structured programs that are difficult to put together. Not every company can do them. Our main business is renting apartments and that's what we do best. Some choose to do non-core business and some do not. We're doing this because we can."

Getting the Company to "Buy-In"

The revenue stream from these programs is welcomed, but is not enormous. "Whether it is worthwhile for a company to start one of these programs just for the revenues depends on the market and the ability to get a strong buy-in from everyone involved," said Buchanan. "If you don't have strong buy-in from even one of these, then there will be difficulties."

Other than distributing brochures to residents, most companies who offer these programs are not spending dollars to promote it. That makes word-of-mouth particularly important. It also slows program growth.

That the programs are designed for such a targeted audience (apartment residents) is of particular appeal to builders, who then see no need to spend money on outside advertising and marketing. That's the case at KB Homes.

"The residents we deal with in these programs have not taken the initiative on their owl to investigate the home purchasing market so these programs create customers for us." said KB Homes' Division President Rick Carruthers. He said that in terms of marketing, these programs are very efficient.

"What's particularly valuable--and certainly unique--is that with the H.E.L.P. Realty program [from TCRS], we can make contact directly with the buyers in their communities," Carruthers said. "All other brokers we deal with won't give us that access--the names--of those in their communities."

It is that unique situation of direct-to-buyer that helped Coldwell Breaker's Managing Broker, David Robinson, overcome the reservations his own sales professionals had.

Training and Education

Training of front-line sales executives remains uneven, which some from companies with a rent-to-own program said is perhaps the greatest challenge facing them

According to BRE's Tyler Lenz Kemmer, Vice President of Ancillary Services, "To tell you the truth, a whole lot more can be done with these programs, fine-tuning them and making sure they're effectively sold. The actual battle is to make sure the leasing agents are trained to do the promoting, to ensure our assets are trained.

Buchanan agreed. "The hardest part is educating the residents who haven't heard about it," she said. "How successful you are depends on how supportive the property' management company is, because you have to get the word out to the residents."--LRQ

How Does It Work?

Rent-to-own programs are becoming increasingly flexible and user-friendly. They cost the resident nothing. Attempts were made years ago to charge membership fees for participating in the programs, but residents rejected the notion.

The financial structure of the programs is designed to be easily understood. In most cases residents earn dollar credits for each month they are in their unit--generally 20 percent of each month's rent, although Equity Residential offers as much as 25 percent.

Trammell Crow gives a 20 percent credit, so if the rent is $1,000 a resident accrues $200 every month.

"Typically, the resident receives the money in the form of a credit on the home purchase settlement.

"Apartment owners cannot offer $2,000 off of the apartment lease and remain profitable," said Jennifer Buchanan, Vice President of Business Development at Trammell Crow. "In our case, HELPAmerica Buy Homes receives a commission from the home sale, which we share with the resident."

In most cases, the amount of credit the resident receives ultimately depends on the purchase price of the house. Buchanan said, for example, a person buying a $200,000 home receives a maximum of $2,000; those paying $275,000 or more receive as much as $4,000 in credit.

Buyers of previously-owned homes receive smaller credits because the apartment community owner receives only a referral fee from a company such as Coldwell Banker rather than a full commission for selling a new home.

"If you are a builder and offer new-home sales, RESPA (Real Estate Settlement and Procedures Act, the federal law governing the selling, buying and lending for home purchase) law allows a seller a contribution of up to 3 percent of the purchase price if the loan-to-value on the house is 80 percent or greater; if it's under 80 percent you can contribute up to 6 percent," Buchanan said. "We were the first to say to residents, 'In addition to the allowable seller concessions, you can accrue home purchase money through HELPAmerica. So, on a $100,000 home, the builder (seller) can give as much as $3,000 toward closing costs and HELPAmerica can still contribute $2,000."

Finally, "preferred lenders" participating in these programs may offer residents their own incentives such as slightly more attractive financing.

In many cases the programs are retroactive, meaning residents may join at may time while they are living in an apartment and earn credit for all months they lived at the community. Therefore, everyone is a "member" of a rent-to-own program even if they don't know it or haven't signed any paperwork.

Some builders offer comprehensive, education seminars that do everything from identifying target properties for apartment residents to explaining credit issues and concerns.

In the case of many programs, residents may take their existing credits with them if they move from one Equity-owned apartment complex to another, regardless of where it is located. Additionally, if someone shares an apartment with a roommate, credit is not diluted under Equity's program; each roommate gets the full 20 percent plus credit separately.

Summit Properties, Charlotte, N.C., is attempting to make it even easier for residents, giving a $2,000 credit to those who live in its apartments and move into homes, regardless of the purchase price.

"We're dollar-driven rather than percentage driven," said Rob Bishop, Vice President of Asset Management for Summit Properties.

"The percentages become very complicated for the residents. And, if you have a straightforward program, the residents' interest in it will be greater."--LRQ

Lawrence Richter Quinn is a freelance writer based in Washington, D.C.