John Royce has 30 years experience in real estate finance, but he's the first to acknowledge that he doesn't know where the residential market in northern Nevada is headed next.
Cautiously very, very cautiously Royce is rolling out a program to link up investors who want to edge back into real estate with otherwise-solid families who lost a home during the downturn.
The vehicle: A rent-to-own program that reinvigorates an old-fashioned tool of residential real estate finance.
Royce isn't alone. The region's largest residential brokerage, Dickson Realty, is working with The Grupe Companies of Stockton to market a rent-to-own program known as "Fresh Start."
Since rolling out Fresh Start about 60 days ago, Dickson has signed up two families that are pursuing the rent-to-own option and has heard from numerous others who are somewhere in the application process, says Nancy Fennell, president and chief executive officer of Dickson.
While lease-purchase programs differ in some details, they generally follow a similar template.
Like the Fresh Start program offered by Dickson, the lease-option program launched a few weeks ago by Royce's Sierra Home Investors a program dubbed "Home Again" works exclusively with consumers whose rocky experience in the residential market is about the only black mark on their credit history.
"They've had a glitch," says Cheryl Muzinich, a program manager with Home Again. "You can't have a 10- or 20-year history of bad credit."
In the Home Again program, a mortgage broker helps consumers determine how much house they can afford. The consumer works with a real estate agent to find a house.
Nearly 70 Dickson agents, meanwhile, have completed training with The Grupe Companies and are prepared to help families find a lease-option home once the family's application has been approved.
Once a participating family has found a home, the companies that provide lease-option programs carefully inspect it. In the Fresh Start program, The Grupe Companies a major homebuilder in California completes the necessary repairs.
The home then is purchased by The Grupe Companies in the Fresh Start program or by an individual investor who pays cash in the Home Again program.
The consumer pays at least $5,000 upfront in the Home Again program and signs a lease that requires monthly payments equal to 0.9 percent of the purchase price. Ten percent of the monthly payment is set aside to help pay for ultimate purchase of the property.
The upfront cost in the program offered by Dickson Realty is about $7,500 to $8,000 once inspection fees and the like are included, Fennel says.
After a minimum of two years, consumers who sign on to the Home Again program have an option to buy the house for the original selling price plus 8 percent a year. After six years, if the real estate market has remained flat, the consumer can buy the home for the investor's original cost, plus 10 percent.
Alternatively, they can walk away after six years, giving up the money they paid for the option as well as the money that was set aside from each monthly payment.
The Fresh Start program marketed by Dickson Realty aims to help families build enough cash between the upfront payment and the monthly set-asides to make a down payment on the home within three to five years.
Royce doesn't plan to assemble a large pool of money to fund the purchases of multiple houses.
"Each deal will be underwritten separately," he says. "We're going to get into this slowly."
Consumers who sign up for the Home Again lease-option program will be responsible for maintenance of the homes. They'll be responsible, too, for keeping in touch with a mortgage executive who makes sure they're rebuilding their damaged credit.
While investors have expressed initial interest, Royce has yet to take any specific deals to them.
For investors, Royce positions the program as a relatively low-risk way to once again include real estate in their portfolios. They give up some of the upside with the option held by the renter, but their investment is secured by a home occupied by a carefully screened tenant.
Muzinich says Home Again will pay a commission of 2.5 percent to real estate agents who refer clients to the program and
help locate a home. For agents who locate a home for a client generated by Home Again, the commission is 2 percent.
"It's a minimal amount of work for the agent," she says.
Sierra Home Investors LLC generates its revenues with a cut of the upfront fee paid the consumer, Royce says, and the company also gets a cut of the option-strike price on the back end of the deal.
