Turning renters into owners is not a simple solution to housing affordability
Housing affordability is a tough, multi-faceted problem. Portland is wrestling with one approach to that, a new ordinance that would make it easier to build “missing middle” housing, like duplexes, triplexes and fourplexes in city neighborhoods. According to a recent article in Willamette Week, Portland City Commissioner Chloe Eudaly says that her price for voting in favor of the City’s proposed Residential Infill Policy is that the city enact a “tenant opportunity to purchase requirement.” In Eudaly’s view, giving tenants a right to purchase their home or apartments could potentially forestall displacement and insulate tenants from future rent increases.
What is “Tenant Opportunity to Purchase?
If you’re a hard pressed tenant, the life of a landlord must seem pretty sweet, sitting back and collecting rent checks and raising the rent, pretty much with abandon. Owners hold the cards, renters play the hands they’re dealt. What if this power imbalance could be addressed by giving tenants the right to buy the places they’re renting? If you just owned your home, rather than renting it, then all those rent checks would go into your pocket, instead of the landlord’s, and you’d be insulated–forever–from rent increases.
That’s more or less the thinking behind the “Tenant Option to Purchase” proposal being floating in Portland. When a building comes up for sale, the landlord would be required to give existing tenants of a house or apartment building a “right of first refusal,” meaning that if the tenant could match the purchase price offered by some other buyer, they would have the legal right to buy the property at that price. In principle, it sounds neat: tenants can use their money to pay off a purchase mortgage (and own the property) rather than sending in rent checks every month).
In practice, its much more complicated. While simple enough when we’re talking about a single family house or one condominium, where its one household financing and owning one dwelling, its dramatically more complex when we’re talking about multiple tenants in an apartment building. In order to buy anything, the tenant is going to have to find and qualify for a mortgage (which, given the economic status of most renters is going to be a big challenge). Its even bigger if we’re talking about a group of renters, who would presumably have to form a cooperative or find some non-profit organization to serve as their collective agent.
Washington DC’s TOPA Act
The Eudaly proposal is apparently modeled on one that’s been in place in one form or another in Washington, DC, for about thirty years. Washington’s program is called “TOPA” the “Tenant’s Opportunity to Purchase Act.” TOPA generally grants tenants a grace period and right of first refusal to purchase their building if it is to be sold. It’s problematic to make this work for larger multi-unit buildings, because its difficult for tenants to collectively arrange financing. Creating a co-op or finding a non-profit organization to serve as a purchaser is often extremely difficult.
In Washington, renters have the option of selling or transferring their purchasing rights to third parties. For many, that seems simpler and more economically advantageous than taking a chance on buying a property. In Washington, tenants can sell their rights-of-first refusal to a third parties. Third-parties purchasing TOPA rights can either benefit a developer, or blackmail a purchaser. The existence of these shadowy property rights can lead to financial scams. Homeowners can’t sell their homes without demonstrating to buyers that all those with “TOPA” rights have waived them; one first-time homebuyer found was faced with a demand to pay $10,000 at closing to induce a tenant to waive TOPA rights; when she balked, a developer bought them and took the home. The District of Columbia has a small cottage industry of lawyers and developers who capitalize on buying and selling TOPA rights.
As it turns out, TOPA hasn’t created a lot of homeowners. In practice, few tenants succeed in acquiring a building even when they invoke TOPA; according to the Washington Post:
Last month, the D.C. Council sought to remedy this problem. It passed a bill that, to a large extent, eliminated TOPA from single-family dwellings. The council relied, in part, on a study that showed from Oct. 26, 2009, through Aug. 15, 2015, out of 398 TOPA offers only 19 were successful. In other words, although landlords complied with TOPA, less than 5 percent of renters ended up buying their home.
Turning renters into owners doesn’t fix affordability
Even if it didn’t produce this kind of scammery, there are good reasons to question question the utility of a tenant opportunity to purchase plan: Turning renters into an owners sounds great in principle, but in practice it is a costly and risky option for a lot of renters. Many renters are renters out of economic necessity rather than than choice, and may find it difficult to acquire the down payment or qualify for a loan to purchase property. For many the low commitment of renting is a critical advantage. Renting month-to-month or for a year or less confers the flexibility of being able to move when life circumstances, family arrangements or job opportunities change. Owning a home raises the cost and decreases the probability of being able to move. Tenants can walk away from a rental with little financial damage; as millions of homeowners who faced foreclosure and bankruptcy the last time the housing market went south, the personal financial consequences are devastating. Homeownership is no guaranteed financial bonanza; as we’ve long documented at City Observatory, there’s no guarantee that a home is a good investment; a third or more of homes are likely to be worth less than their purchase prices a few years on. Given the way credit and housing markets work, promoting homeownership has been a risky, often wealth-destroying strategy for low income households and people of color.
As Ethan Seltzer pointed out in a commentary at City Observatory, the more difficult, opaque and risky we make it for people to be landlords, the fewer people will be interested in renting out their property. If we want to encourage a profusion of “missing middle” housing types, that necessarily implies a lot more “mom and pop” landlords. Redefining property rights tends to create uncertainty and raise transaction costs; neither buyers or sellers can be sure of what they’re getting when there’s the possibility, as there is in Washington, that a sale may fall through unexpectedly because someone asserts a right of purchase. Housing affordability is a big issue, but its not one that’s likely to be solved by recasting property rights to try to turn more renters into owners.
Why TOPA isn’t the tops
Turning renters into owners is not a simple solution to housing affordability
Housing affordability is a tough, multi-faceted problem. Portland is wrestling with one approach to that, a new ordinance that would make it easier to build “missing middle” housing, like duplexes, triplexes and fourplexes in city neighborhoods. According to a recent article in Willamette Week, Portland City Commissioner Chloe Eudaly says that her price for voting in favor of the City’s proposed Residential Infill Policy is that the city enact a “tenant opportunity to purchase requirement.” In Eudaly’s view, giving tenants a right to purchase their home or apartments could potentially forestall displacement and insulate tenants from future rent increases.
What is “Tenant Opportunity to Purchase?
If you’re a hard pressed tenant, the life of a landlord must seem pretty sweet, sitting back and collecting rent checks and raising the rent, pretty much with abandon. Owners hold the cards, renters play the hands they’re dealt. What if this power imbalance could be addressed by giving tenants the right to buy the places they’re renting? If you just owned your home, rather than renting it, then all those rent checks would go into your pocket, instead of the landlord’s, and you’d be insulated–forever–from rent increases.
That’s more or less the thinking behind the “Tenant Option to Purchase” proposal being floating in Portland. When a building comes up for sale, the landlord would be required to give existing tenants of a house or apartment building a “right of first refusal,” meaning that if the tenant could match the purchase price offered by some other buyer, they would have the legal right to buy the property at that price. In principle, it sounds neat: tenants can use their money to pay off a purchase mortgage (and own the property) rather than sending in rent checks every month).
In practice, its much more complicated. While simple enough when we’re talking about a single family house or one condominium, where its one household financing and owning one dwelling, its dramatically more complex when we’re talking about multiple tenants in an apartment building. In order to buy anything, the tenant is going to have to find and qualify for a mortgage (which, given the economic status of most renters is going to be a big challenge). Its even bigger if we’re talking about a group of renters, who would presumably have to form a cooperative or find some non-profit organization to serve as their collective agent.
Washington DC’s TOPA Act
As it turns out, TOPA hasn’t created a lot of homeowners. In practice, few tenants succeed in acquiring a building even when they invoke TOPA; according to the Washington Post:
Turning renters into owners doesn’t fix affordability
Even if it didn’t produce this kind of scammery, there are good reasons to question question the utility of a tenant opportunity to purchase plan: Turning renters into an owners sounds great in principle, but in practice it is a costly and risky option for a lot of renters. Many renters are renters out of economic necessity rather than than choice, and may find it difficult to acquire the down payment or qualify for a loan to purchase property. For many the low commitment of renting is a critical advantage. Renting month-to-month or for a year or less confers the flexibility of being able to move when life circumstances, family arrangements or job opportunities change. Owning a home raises the cost and decreases the probability of being able to move. Tenants can walk away from a rental with little financial damage; as millions of homeowners who faced foreclosure and bankruptcy the last time the housing market went south, the personal financial consequences are devastating. Homeownership is no guaranteed financial bonanza; as we’ve long documented at City Observatory, there’s no guarantee that a home is a good investment; a third or more of homes are likely to be worth less than their purchase prices a few years on. Given the way credit and housing markets work, promoting homeownership has been a risky, often wealth-destroying strategy for low income households and people of color.
As Ethan Seltzer pointed out in a commentary at City Observatory, the more difficult, opaque and risky we make it for people to be landlords, the fewer people will be interested in renting out their property. If we want to encourage a profusion of “missing middle” housing types, that necessarily implies a lot more “mom and pop” landlords. Redefining property rights tends to create uncertainty and raise transaction costs; neither buyers or sellers can be sure of what they’re getting when there’s the possibility, as there is in Washington, that a sale may fall through unexpectedly because someone asserts a right of purchase. Housing affordability is a big issue, but its not one that’s likely to be solved by recasting property rights to try to turn more renters into owners.
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