Last week, a report highlighted rent-to-own properties as the future of the housing market but a new report from Kroll Bond Rating Agency threw a wet blanket onto anyone who was ecstatic about the new trend. According to KBRA, rent-to-own properties pose more risks for investors than single-borrow, single-family rental securitizations.
KBRA cited possible legal problems as the primary concern of such type of properties. The report pointed out that there are plenty of legal questions that surround deals involving rent-to-own properties, particularly whether rent-to-own deals can be considered as predatory lending.
"A primary concern was the legality of purchase options associated with rent-to-own properties are largely untested and there is a possibility that these purchase options could subsequently be found to violate consumer protection and/or predatory lending laws," the report stated.
Another concern that KBRA brought up in its report is that rent-to-own properties have the "heightened risk of adverse selection" that would negatively affect the bondholders.
According to the report, adverse selection "could potentially materialize in the form of higher tenant default rates, as well as in the form of cherry-picking" under the rent-to-own scheme.
KBRA also highlighted the "significant" difference in terms of credit quality between single-family rentals and rent-to-own tenants.
"To date, the tenant delinquency rates in typical single-family rental transactions have averaged at less than 1 percent, with limited variability across transactions and time," KBRA said in the report. "This consistency can at least partially be attributed to the relatively similar business models and tenant selection criteria employed by SFR operators."
"However, the rent-to-own model may specifically attract only those tenants that ultimately want to own the rented property, but who currently lack sufficient credit to enable them to obtain motgage financing, thereby self-creating a concentration of only weaker tenants versus a more normal distribution in tenant quality," KBRA continued.
