With the real estate market, across the world, facing a massive slump, both the financial markets (through the mortgages and their securitised versions) and the real economy (through the weakness in the construction sector, with its multiple cross-sectoral linkages) are getting squeezed. Real estate developers and builders, who made windfall profits during the boom, are now crying hoarse and calling for government assistance.
I am inclined to believe that instead of waiting for outside help, they ought to be looking towards the market for the way out. Fortunately, the markets appear to be more resilient. For example, some real estate developers in the US have come up with the Rent Now, Buy Later plan, under which prospective owners can lease property now with the option to buy it later, using part of the rent (a major portion) toward the purchase cost.
Rent-to-own options, which come in many variations, have become increasingly common in the US, especially for developers in areas where home foreclosures are high. Real estate brokers have been revamping their approaches to marketing hard-to-move property with offers similar to people to "test drive" homes and neighborhoods, and by offering renting with an option to buy.
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.
In many ways, rent-to-own model of marketing homes is a pro-active nudge aimed at helping buyers make choices, especially at such difficult times. Time for the DLFs and Unitechs of India to collaborate with financiers and offer similar innovative products?
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