US Home Builders Work Hard To Turn Renters Into Buyers

To turn renters into home owners, desperate home builders are being creative. They're gathering addresses to contact tenants, participating in rent-with-equity programs and wooing them with pet adopt-a-thons.

It's another strategy to boost anemic sales as the sector limps through its worst downturn in decades, one that has shuttered several builders nationwide. And some say renters, who have always been a huge market for home builders, now may be more important than ever.

"The tougher the market gets, the more back to basics we get," said Dan Klinger, president of K. Hovnanian American Mortgage, the lending subsidiary of builder Hovnanian Enterprises (HOV). "And soliciting renters is about as basic as it comes."

First-time buyers not saddled with an existing home to sell have become critical for a recovery, pushing builders to design smaller and more affordable homes. And they're racing the clock: A federal tax credit of up to $8,000 for qualified first-timers expires Dec. 1, while funds for California's credit of up to $10,000 for buyers of new homes could be exhausted soon.

Builders are accentuating the positive - near record low interest rates and more affordable prices that may make owning cheaper than renting. Of course, builders face many hurdles, including fears among home buyers that prices have further to fall, the inability to secure credit, mounting foreclosures as well as job insecurity that makes renters reluctant to commit.

Indeed, Mid-America Apartment Communities (MAA) last week said the number of renters leaving their properties to buy a home in the first quarter fell by 31% compared with a year earlier.

Still, with nearly 89 million renters nationwide, there's plenty of potential to sell the 340,000 single-family homes residential research firm Metrostudy estimates will be started this year.

"If every one of them was from a renter you're just barely putting a dent in the apartment supply out there," said Jeffrey T. Mezger, KB Home's (KBH) president and chief executive. "I think it's a large untapped market."

KB Home, the nation's fifth-largest builder by annual closings, redid its Web site to highlight monthly payments over the total price. At the Sage at Desert Passage in former bubble market Maricopa, Ariz., "Right Now You Can Own From $773 a Month," assuming a down payment of 3.5%, good credit and a 30-year fixed loan.

"It's a very powerful tool," Mezger said.

The builder also offers more flexible and personalized floor plans.

"It's certainly been a help because our sales are up and our first-time buyer sales are up," Mezger said, adding that in its first quarter 70% of deliveries went to first-time buyers, a spike from 53% a year ago.

Because renters often live in cookie-cutter communities with plain-vanilla walls, KB Home holds seminars in its design studios that let buyers craft a near-customized house - a strategy that also helps compete with those foreclosures. It highlights features apartment dwellers might desire, such as garages, ample storage and laundry facilities that don't require "pockets full of quarters."

And, because renters can be banned from having pets, it frequently holds adoption events at new communities, partnering with a local animal group and paying some of the adoption fee, which includes vaccinations, a microchip, spay/neutering and disease testing. The popular events aren't limited to buyers.

KB Home and several other builders also work with apartment giant Equity Residential (EQR) in its Rent With Equity program. For each rent payment, Equity grants as much as 20% in a non-cash rent credit. Buyers can use the credit for up to 3% off the home price.

The free service that helps Equity with tenant retention is offered in more than a dozen states and, according to the Web site, participating public builders include Beazer Homes (BZH), Ryland (RYL), Pulte Homes (PHM), Centex (CTX) and DR Horton (DHI). While the program is not new - and it wasn't necessarily needed when frenzied buyers camped overnight during the boom - "it's again becoming more prevalent."

Like KB Home, Hovnanian, the sixth-largest builder, holds seminars, usually with a draw including cookies, bagels or pizza. Topics include strategies for saving a downpayment - including using the rental security deposit - credit checks and mortgage information.

"You talk to a customer about how little cash is necessary to own a new home, at the same time prequalify them to make sure they can get a mortgage," Klinger said. "...You can take care of everything in one sitting."

To find participants, Hovnanian distributes fliers at apartment communities. But instead of placing information under door mats or under a car windshield wiper, Klinger prefers mailing renters directly. The company studies rental communities, looking for monthly rents that match nearby homes, and then mails potential buyers information.

"It probably wouldn't be a good idea to go on the premises and solicit their renters," he said.

-Dawn Wotapka; Dow Jones Newswires; 201-938-5248; [e-mail]