A significant portion of younger potential homebuyers would consider entering into a rent-to-own agreement, a recent survey by Javelin Strategy & Research shows.

More than half (55%) of Gen Zers and 37% of millennials are willing to make one of these transactions, Javelin revealed in a report on the home lending industry, “Mortgage Pandemic or Just the Sniffles: Fast- Track Cures and Long-Haul Boosters.”

Sure, rent-to-own deals currently account for less than 2% of housing situations, but Javelin said that points to a broader business opportunity for banks, lenders, investors and incubators.

In particular, they suggest that lenders should shift from focusing on buying long-term mortgages to offering a suite of housing solutions focused on the flow and changes in people’s life cycles.

Younger consumers are more interested in a “test drive” of any property they may occupy long-term, said Babs Ryan, principal analyst at Javelin’s digital lending practice.

“What they want is a chance to try something before they go all out,” Ryan said. “They don’t know if they’re going to like the house.”

While some rent-to-own applicants don’t have the funds for a down payment, it’s not universal. Serving renters and those in multigenerational households involves a larger population than homeowners, with 14.3 million renters planning to move in the next 12 months versus 5.4 million who already own a primary residence, according to show US census data

“The number one reason the mortgage market has been so depressed is that lenders haven’t given people a reason to move,” Ryan said. “They’ve provided products after they’ve decided to move, but they haven’t given them a reason to move.”

To Generation Z and millennialsLiving in a multigenerational household saves them money while they’re not in a committed relationship and also allows them to avoid a market where home prices and interest rates are rising.

“The pandemic has created a lot of uncertainty about life, that’s what’s behind it,” Ryan added. “Why would I commit to buying a house or a condo if I don’t know what I’m going to do three years from now? We hear that over and over again.”

Javelin found that among consumers, leasing has little recognition, even though one company in the business, Landis, has investors with celebrity name recognition, Jay-Z and Will Smith. Other companies like Houses Road Y fintech division they are also active in this line of business.

However, several of these arrangements have come under regulatory scrutiny for alleged predatory lending, generating a warning of then-superintendent of the New York State Department of Financial Services, Maria Vullo, in 2018.

Too, Vision Property Management settled a lawsuit brought by the NYDFS and Letitia James, the state attorney general, for $3.75 million in 2020. But the company was sued later that year for Michigan-based civil rights organizations for their practices.

Ryan noted that in many cases to date, consumers have only been offered rent-to-own opportunities because it was the only way they qualified and that contributed to legal sensitivities in the Vision lawsuits.

There is a broader opportunity for the mortgage industry in the rent-to-own space because “no one has gotten the formula right,” he said.

“If someone did, it would really work for consumers and could be beneficial for investors as well,” Ryan added.

One example that US lenders can copy is the UK’s Lloyd’s Bank, which not only offers buy-to-let mortgages, but has set up a company, Citra Living, which is reportedly investing in up to 50,000 newly built homes in that base, Ryan said.

Rent-to-own options typically add dollars to the list price, whether for a home or a consumer good. But models that put a portion of the rent toward a down payment can help people save for a home. And that’s just one of the hundreds of ways rent-to-own can do that.

Also, having to pay more to have the option to back out of the deal is something younger consumers value, he added, reiterating that mortgage lenders are concentrating on fixing the wrong problem.

“Instead of focusing on faster service or quicker onboarding, they should focus on ‘why can I help someone move’, creating solutions that help people throughout their lives rather than just focusing on products for someone looking to buy something,” Ryan said.

Among the surprising findings Javelin came across is that many consumers view rent-to-own as an opportunity to try buying a second home or even an investment property that will be subleased.

This way, they can see if the “snowbird” lifestyle works for them, Ryan said. When it comes to investment properties, rent-to-own allows the potential buyer to see if it can be a viable deal for them.