Free Market Realty Consulting



Whatever happened to the dream of home ownership in America?
Are houses too expensive, wages and salaries too flat? Is being a “long-term renter” (defined as renting for more than one year) the new normal in today’s housing market?
Regardless of the answers, one simple truth remains – many renters would prefer be homeowners, but can’t qualify for a mortgage loan. As such, they feel as if they have no other choice than to wait and wonder if or when it’s ever going to happen. That said it’s our opinion that home ownership is much closer than many people realize, once they begin to receive the right kind of information and assistance.
Since the housing market crash of 2008 and the resulting overregulation that followed, the institutional mortgage lending establishment has stifled the dream of home ownership as many Americans once knew it. In short, the pendulum of reform has swung too far in the opposite direction, which has artificially augmented the renting population, as well as the rents. In California, for instance, in both Los Angeles and Orange counties, to name just a few, rent payments on condos and single family homes exceed the cost of a mortgage on those very same properties.
Traditionally, the point at which rent payments become equivalent to or greater than mortgage payments is when the market “adjusts” (self regulates) and renters make the decision to become homeowners. However, big government regulations, overly stringent credit markets, and a variety of other factors are obstructing the natural order of the free market. Therefore, we have a new problem – a drought in mortgage financing.
According to the Consumer Housing Trends Report 2016, published by the Zillow Group, 56 percent of today’s renters are Millennials (ages 18-34), as many would expect, yet a staggering 28 percent of the renter pool is part of Generation X (ages 35-49), which is a far more troubling statistic. Heck, even the Baby Boomers (ages 50-64) make up a whopping 12 percent of the renting population at large! But, for the sake of this discussion, let us focus our attention on the first two groups, as they make up the vast majority of the renting population.
The reasons for renting are numerous, but essentially fall into one or more of the following four categories:
  • Flexibility (e.g., not being tied down to a mortgage or housing maintenance responsibilities, liberty to move about the country to capitalize on career opportunities, etc.)
  • Convenience (e.g., closer proximity to work than a purchased home, waiting for kids to finish school before settling, etc.)
  • Affordability (debt and income challenges)
  • Credit Challenges (debt load, late payments, collection accounts, and other derogatory items)
The first two categories (Flexibility and Convenience) represent a particular lifestyle choice and are, for the most part, voluntary in nature. On the other hand, the latter two categories (Affordability and Credit Challenges) are a simple matter of financial feasibility – that is, if these individuals were financially fit to purchase a new home (in the eyes of their lender) then they would certainly not choose to rent an apartment.
In fact, the reality is that many long-term renters actually prefer to be homeowners, but simply cannot qualify for a mortgage loan. Therefore, after being declined for a loan, and having no alternative solutions, many would-be home buyers resign to continue throwing away their hard earned money on outrageously high rent, instead of building equity. I’ve personally known a number of these people, both past and present clients, and the feelings they share are the same: lack of resolve, frustration, anxiety, and urgency.
It’s no secret that housing prices in southern California are rising. It’s also pretty obvious that interest rates have nowhere else to go but up, as evidenced by the Fed’s recent interest rate hike (0.25% increase) back in December, and plans for future raises this year. And if that’s not bad enough, the fact that wages and salaries are pretty much flat, and the credit markets still very tight, only adds insult to injury. Hence, one might deduce that affordability is at a definite low.
Having said that, if you make good money, have substantial savings for a down payment, but have some credit challenges and were previously declined for a mortgage loan, then I am here to tell you that home ownership is absolutely within reach.
So, how can this be done? First of all, please keep in mind that, as with most endeavors, there are usually a number of different ways that one can achieve the same objective. Home ownership is no different. Below is an example of a recent purchase transaction I helped a client of mine put together, which recently closed.
Deal Summary
My client was looking to purchase a luxury condominium in downtown Los Angeles. He is an entrepreneur, earns a very nice living, and has the capacity to pull together a substantial down payment. However, along the way of his entrepreneurial journey (the year 2011, to be exact), he had a failed business venture, which cost him tax and credit problems, among other things. Nevertheless, like many others, he was fed up with watching his rent dollars going away and never returning, so, one day, he contacted a mortgage broker to help him locate a lender who could pre-approve him for financing. Unfortunately, that day never came, so he reached out to me for help.
After a brief consultation, we concluded that a rent-to-own scenario would be the best fit for him. We also recognized that just about all of the mainstream banks, credit unions, and other institutional mortgage lenders simply didn’t have the appetite to finance someone with his particular credit profile. Therefore, we needed to find a smaller, portfolio lender who would – and we did.
Essentially, our client needed approximately six months to remedy a few credit issues and move around monies to secure his down payment. So – we went to work and locate a beautiful, contemporary loft in the downtown Los Angeles Arts District. We negotiated a six month lease, with the option to purchase the property at any time prior to expiration of the lease. The Option to purchase the property cost my client $15,000 (non-refundable monies, which would be applied to the purchase price, at closing). His lease payment was $3,500 per month, with a $9,000 Rent Credit (also monies which would be applied to the purchase price, at closing).
The Numbers


Purchase Strategy:
Lease Term:
6 months
Lease Payment:
Security Deposit:
Asking Price:
Option Deposit:
$15,000 (non-refundable)
Rent Credit:
Contract Price:
Down Payment:
Earnest Money Deposit:
First Mortgage:
Monthly Payment:
Lease vs. Mortgage Savings:


If rent-to-own is a new concept to you then it might seem a bit complicated, at first glance, but I assure you that all of this transpired without a hitch, and all parties walked away from the transaction happy winners.
In closing, if you truly believe that you have no other choice than to continue paying high rent and wait to purchase your first or next home then I would implore you to, at least, consider the possibility that you could be terribly wrong. And then I would challenge you to both seek out alternative solutions and speak with a competent real estate professional who knows more about nontraditional real estate financing than your average broker or agent. After all – we are NOT created equal!
If you have any questions, whatsoever, please don’t hesitate to contact me.