In search of buyers, Toll takes renters -- for now
NEW YORK, Oct 29 (Reuters) - Luxury home builder Toll Brothers Inc (TOL.N), finding fewer takers for its pricey condos in a market slump, is playing landlord in a bid to lure skittish buyers.
The builder, whose average home price of $672,000 is almost twice that of its nearest rival Standard Pacific Corp (SPF.N), is even trying this tactic in in New York City, where condominium prices seemed immune to a downturn until recently.
"The market was different," said Toll Vice President David Von Spreckelsen. "This is new territory."
Toll has mounted rent-to-own programs in New York City; Singer Island, Florida; and Scottsdale, Arizona, under which tenants have time to rent while they consider buying.
Builders tend to deploy rent-to-own during the downside of a housing cycle, said Mollie Carmichael and Lesley Deutch of Irvine, California-based John Burns Real Estate Consulting.
"It's the product of tough times and also the number of homes that are out there competing. Kudos to Toll for taking a creative approach," Carmichael said.
The U.S. housing sector, mired in its worst slump since the Great Depression, continues to flounder as excess supply, higher mortgage rates and volatility in the stock market has kept buyers on the fence and prices down.
Toll posted a loss of 18 cents per share in its most recent quarter, as its revenue fell 34 percent, to $797.7 million.
Home prices will drop 15 percent in 2008 and 6.4 percent in 2009, according to the median forecasts of a Reuters poll of economists taken Oct. 21-24.
To cope, U.S. builders have adopted a range of survival strategies, from selling land at a loss -- even if they bought it at peak prices during the boom years -- to ramping up incentives, building cheaper homes and even lowering prices to move their inventory of unsold homes.
In such times, rent-to-own's near-term benefits outweigh its longer-term disadvantages, Carmichael said. "It impacts your value in the long term but it brings in income when they're looking for some way to stop the bleeding."
A previously rented apartment typically fetches a lower price when it finally does sell than an apartment that was never rented, Carmichael said. Also, rents, unlike prices, are limited, she added. Bigger apartments of 3,000 square feet or more do not fetch proportionately more rent the way they would fetch proportionately higher selling prices.
MEANS TO END
Rent-to-own is not for everyone. Builders tend to use it in condominiums and other attached housing, not in single-family detached communities.
Centex Corp CTX.N, Pulte Homes (PHM.N) and Hovnanian Enterprises (HOV.N), for example, which all rank in the top 10 of U.S. builders and are known for single-family detached homes, said they do not offer any such options.
D.R. Horton (DHI.N), the biggest U.S. builder, declined to comment.
And even for Toll, rent-to-own is a means to an end.
"Our intent is to sell condominiums, not rent them," said Louis Corsa, project manager at Ocean's Edge at Singer Island, a 40-unit building that about two weeks ago started offering seasonal and annual leases on three condos that rent from $6,000 to $11,000 per month, either furnished or unfurnished. "But we want to make every option available to buyers in this buyer's market."
Renters can renew their lease if they want, and if they decide to buy can apply up to a year's worth of rent, minus taxes, toward their purchase. The average Ocean's Edge unit costs about $2.5 million, Corsa said.
Toll's rent-to-own program is part of the company's effort to generate creative ways to soothe buyers' anxieties, said Mark Bailey, a Toll vice president who runs The Mark, an 85-unit condo in Scottsdale offering the rent-to-own option on all 71 of the available units.
Prices range from the high $300,000s up to $2.3 million, and were cut before the building officially opened in February. Rents range between $1,500 and $3,800 per month.
Since July, when the program started, nobody has bought in The Mark, but seven renters have moved in.
"Buyers walk in the door and they're leery. This program allows us to put them in a home and it helps calm their fears," Bailey said.
At The Mark, renters lock in the price on offer at their move-in date, and if they decide to buy, 50 percent of their monthly payments goes toward the purchase.
The program works differently at Toll's Northside Piers in New York City, where 10 one-year leases are available through a local broker instead of the sales office. Rents are in the range of $4,000 to $5,000 per month and prices for the two- and three-bedroom units range from the low $800,000s to about $1.2 million.
In that building, the company credits more rent toward the purchase price the earlier a renter decides to buy, Toll's Von Spreckelsen said. (Reporting by Helen Chernikoff, editing by Richard Chang, Dave Zimmerman)
