Continued...

Not So Simple

Lease-purchase is not a new concept, but it has been fairly rare for a long time, in large part because it is not easy. Unfortunately, when it’s approached as plan B by an organization under duress, the level of planning and capacity needed to make a successful program is often not in place.

“Many nonprofits and local government sponsors are ‘backing into’ lease-purchase as they fail to sell completed properties,” says Cramer. “Too often lease-purchase is attempted without a program design or much planning—just occupy with a renter with the hope that they will eventually buy.”

Leaders of some of the few long-term lease-purchase programs in the country all say treating lease-purchase as merely a delayed version of a traditional for-sale homeownership program is a very bad idea.

Bill Goldsmith, now president of Mercy Housing Inc. in Chicago, and Cindy Holler recently wrote a white paper about the lessons they learned on the way to developing what became a successful lease-purchase program at a faith-based CDC called New Cities in Chicago’s southern suburbs. New Cities was formed by its member churches in 1989 expressly to deal with a single-family home foreclosure crisis. “New Cities did a lot of great things, but our initial trial at lease to purchase was not one of them,” wrote Goldsmith and Holler. “Although it took almost 10 years, over half of these 60 homes [from the original trial] eventually failed as lease to purchase properties and were sold at a significant loss [to the organization] to local speculators.”

Goldsmith and Holler say that several things sunk their first trial: They didn’t screen or coach their buyers sufficiently, leading to participants with not enough capacity for or commitment to homeownership. The homes were bare-bones rehabs in struggling neighborhoods, meaning that families were less committed to or excited about buying them. And they were trying to take on what was essentially scattered-site single-family property management (“the hardest kind of rental”) with no particular capacity or infrastructure for it.

Cleveland Housing Network, now known for its long-standing lease-purchase model using Low-Income Housing Tax Credits, also abandoned short-term lease-purchase early on. “Our short-term lease-purchase program was all of one year long,” says CHN executive director Rob Curry. “We just didn’t have enough people taking title. Someone who is making a decision to purchase a home [is] most motivated to get all their ducks in alignment before they move in. After they move in, the motivation is not as clear.”

CHN’s current lease-purchase model is a significantly different animal than typical short-term lease-purchase arrangements. It gives tenants in CHN LITHC properties the option to buy their unit at a very low price after the 15-year LITHC eligibility period expires. The timeframe is associated with the property, not the tenancy—two-thirds of buyers are not the original tenants. The program has been highly successful, with 95 percent of tenants making the transition, but because of its long-term tax-credit-based financing, it’s not an option that can be adopted by those looking for an alternative exit strategy for already-developed homes they can’t sell.