Renting is on the rise in the United States—and so are build-to-rent homes. Declining new home sales in 2023 has many builders looking at build-to-rent for the first time. The sector holds unique challenges and opportunities. Builders prepared to navigate them will be part of a housing market niche attracting billions of investment dollars.
What Is Build-to-Rent?
Build-to-rent (BTR) homes are detached units built specifically as long-term rentals. BTR comprises traditional standalone homes as well as horizontal apartments/cottages, duplexes, row homes, and small-lot houses.
Different than a traditional mom-and-pop landlord, institutional investors typically fund build-to-rent projects and hold the homes as part of a large real estate portfolio.
BTR homes currently make up 6% of the housing market, more than doubling the average over the last decade. While the number may seem small, BTR homes completed the year leading up to September 2022 represent a 42% increase from the year prior. Investors already have billions of dollars earmarked for build-to-rent projects between now and 2030.
Why Are More People Renting Homes?
For those following the money, build-to-rent makes sense. The median new home price hit a record high in 2022 of more than $470,000. At the same time, the Fed increased interest rates. The average rate for a standard 30-year fixed mortgage currently sits at 7.02%. Even with prices down slightly in 2023, the price tag remains out of reach for much of the buyer pool.
But BTR is not just about money. Consumer preferences are changing. Flexibility, accessibility, and convenience represent major selling points of renting versus buying.
The pandemic and the rise of remote offices prompted people to leave urban areas and try new locations across the country. Single families, many now working from home, found they needed more space. Baby boomers, a growing population of renters, want maintenance-free living. The amenities of having a home, without the commitment of a mortgage, also is an attractive value proposition.
How Are Institutional Investors Changing Home Building?
About 52% of rental owners now categorize themselves as institutional investors. That makes them an important customer for builders. But they aren’t just changing how homes are sold. They are rewriting the rules of real estate.
Median homeowner tenure in the United States is 13.2 years. Institutional investors and real estate investment trusts (REITs) typically plan to sell their properties sooner. A buy-and-hold real estate model has investors selling or refinancing sometime after the five-year mark.
This timing matters when it comes to builder home repair obligations.
In a typical builder–homebuyer agreement, the builder is responsible for warrantying various areas of the home in accordance with regulations designed to protect consumers. Institutional investors often are not covered by the same consumer protections—but they may still seek these protections in the contract with the builder.
A standard builder contract for a commercial agreement might look like this:
Construction Warranties: The Contractor shall guarantee that the Work shall be free from any defects in workmanship and materials for a period of not less than one (1) year from the date of completion thereof. The Contractor shall be responsible for the replacement or repair, without additional charge, of all work done or furnished in accordance with its contract which shall become defective within one (1) year after completion of the Work.
Yes, this clause makes builders liable for less time, but also may cost them a lucrative deal with an investor.
Most defects are latent, happening in years four through 10 at a price of about $50,000 each. Savvy investors know these numbers and want more than one year of protection on their investments for themselves. That’s why they often negotiate a more favorable contract that aligns with a state’s statute of repose.
Home warranties offer a valuable tool for balancing the upside of build-to-rent projects with the defect liability protections investors want.
How Can Warranties Protect Builders and Investors?
Home builders should pursue three key steps to protect themselves when entering into agreements with investors and REITs:
- Purchase a structural warranty.
Structural warranties give builders 10 years of financial security and protection against defined structural defects. Structural service contracts are also available to be purchased by either the builder or the investor, with no obligation from the builder. Both types shield builders from long-term exposures while giving investors the protection they seek.
- Consult with a warranty provider early in the contract negotiation process.
Build-to-rent contracts require special language to meet investor demands while not overburdening the builder. PWSC can help craft the best language for the agreement.
- Purchase a System & Appliance Warranty
PWSC’s system and appliance warranty for build-to-rent homes offers an alternative to the typical one year builder warranty. Coverage begins on day one, lasts for two years, and covers the major systems and appliances renters call about most.
PWSC launched the industry’s first warranty solutions specifically designed for build-to-rent homes. We know this market and how to make the most of it. Builders bringing PWSC to the bargaining table minimize their exposure while capitalizing on the BTR boom.
