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Non-Profit Models for Lease-Purchase Agreements

 


Due to disinvestment, population loss and exclusionary housing policies, Detroit’s housing market has experienced distress. There is a need for quality affordable rental housing. However, for many first-time homeowners, conventional long-term rental strategies may prove insufficient, and many communities are likely to want to sustain a substantial level of homeownership in the long turn. Alternative models such as lease-to-purchase programs can offer an intermediate step to the housing issues that Detroit faces.

The Lease-Purchase Contract

This model allows households to rent a home for a period of time before taking on the mortgage or ownership of the property. During the lease period, the renter has exclusive rights to purchase the home. Although the details contained within a contract vary widely based on local customs, nonprofit goals, tenant needs, funding restrictions, and state regulations, they are generally structured the same.[1] The length of the lease period, the rental payment and how it is allocated, the determination of the final purchase price, and the fees associated with the program are some of the key features of the contract

Nonprofit Models

Since the 1980s and early 1990s, the lease-purchase product has been used by nonprofits to create an affordable and sustainable pathway to homeownership. Combined with other housing programs, these lease–purchase arrangements provide opportunities for nonprofits in Detroit to help contribute to redevelopment of the City.

-        Cleveland Housing Network (CHN) Lease-Purchase Program[2] was one of the most successful models. CHN has been operating a lease-purchase program using Low-Income Housing Tax Credit (LIHTC) financing since 1987.[3] What makes CHN so successful in the execution of their approach is their effective property management, the work with individual households around the needs of each family, and the innovative and flexible financing CHN has designed. Detroit programs can incorporate CHN’s successful strategy and provide LIHTC financing for families living in single family homes to help them achieve affordable homeownership. Nonprofits can utilize the learnings of CHN’s lease-purchase work while adjusting for the particular needs for the residents of the City of Detroit and for the operational and experience of the particular organizations.

-        The Community Resources and Housing Development Corporation[4] developed the Learn, Earn, Own program to help low-and-moderate-income households purchase homes while stabilizing neighborhoods under the federal Neighborhood Stabilization Program. An eligible household works with a real estate agent to select a single-family home in greater Denver that is a foreclosure or real estate owned (REO) property,[5] is priced below market value, and meets minimum quality standards, needing only minor rehab. With funding from Neighborhood Housing Services of America, the nonprofit purchases, repairs, and then leases the home.[6]  In CRHDC’s self-help program, participants contribute significant “sweat equity” towards the construction of their home, bringing down development costs and producing a more affordable home.[7] The sweat equity model used by CRHDC can be replicated by Detroit programs to make a home more affordable.

-        Center for Community Self-Help[8], a community development financial institution (CDFI) in North Carolina, developed a model in which nonprofits would buy homes in neighborhoods with high vacancy and foreclosure rates, rehabilitate them, and then rent them under a lease-purchase structure. In this way, lease-purchase would support neighborhood stabilization as well as allow families to rebuild their credit and financial stability after foreclosure or job loss. Self-Help recognizes that the local program needs to be responsive to the local context and would provide for an opportunity to develop program parameters to best meet the conditions in Detroit. This program could be useful in Detroit for programs that have sufficient capacity to run them, particularly as Detroit Land Bank seeks to return homes to use.

-        The success of these programs is dependent on understanding all the costs associated with the program, an effective organizational strategy, a strong lease-purchase contract, clear communication with the tenant, ongoing education, and an exit strategy that considers all the possibilities.

Regulation Issues

Lease-purchase transactions are covered by a patchwork of state laws. This scarcity of regulation is due in part to the market dominance of more traditional methods of homeownership, and the complexity of the lease-purchase approach.[9] Legal gray areas can create opportunities for misunderstandings between the nonprofit and lease-purchasers. In addition, lease-to-own agreements do not benefit from protections against third-party liens on the property.

Because lease-purchase contracts do not involve mortgages or initial transfers of ownership, they are not subject to federal consumer protection laws such as the Truth in Lending Act (TILA) or the Real Estate Settlement Procedures Act (RESPA), which prohibit various unscrupulous activities such as kickbacks between different parties in the home search and purchase process. Additionally, lease-purchase buyers have far fewer rights during the lease period. Finally, most states have few protections for lease-purchase buyers in terms of retaining some of the equity or down payment that accumulated during the lease period in the event of an unsuccessful ownership conversion. One broad type of recommendation is to extend mortgagor protections to lease-purchase buyers including the right to cure, the right to a foreclosure sale and the right to excess profits from any foreclosure sale. Some states have extended some mortgagor-type protections to contract-for-deed buyers, such as rights of redemption, the right to receive restitution for the installment payments or improvements to the property.

Conclusion

Responsible nonprofit lease-purchase programs can be an important part of efforts to provide affordable housing while stabilizing declining or threatened neighborhoods. At the same time, stronger regulations are needed to ensure that for-profit lease-purchase programs operate in a responsible manner. This framework and strategies could be a starting place for the nonprofits in Detroit to develop and refine more specific policy and program interventions.

By: Nelius Wanjohi 

[1] Id.

[5] Real estate owned, is a term used to describe a class of property owned by a lender.

[6] https://www.urban.org/sites/default/files/publication/88656/detroit_path_forward_finalized.pdf

[9] Way, Heather K. 2009. Informal Homeownership in the United States and the Law. St. Louis University Public Law Review, XXIX, 113-192. Retrieved November 30, 2010 at https://law.utexas.edu/faculty/hway/informal-homeownership.pdf

 

 

By: Nelius Wanjohi

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