Oh, Felix...

The normally clear-sighted Felix Salmon dropped his glasses in the sink this morning, and put on the rose-colored ones instead. Averse to the burdens of home ownership, he just discovered the magic of rent-to-buy:

Often, it’s a simple lease with an embedded option to buy the property at a set price on a set date — an attempt to give the buyer a bit of time to scare up a downpayment, and to give the seller an income stream. Typically the option is purchased for cash (1% of the purchase price seems to be standard) at the same time that the lease is signed; generally if the option is exercised, the price of the option is deducted from the purchase price.

Alternatively, rent-to-buy schemes can increase the rental price and apply rent payments to the purchase price: here the price of the option is likely to be embedded in higher rent payments rather than being an explicit up-front payment.

Oh Felix, Felix. This "transferee" (I chose my words with care here) has the obligation to keep or walk away. This is non-recourse debt. Just like all first-mortgage residential in California (and most other mortgage debt here as well, but skip the details). That's what nonrecourse means: keep or walk away.

And he isn't done yet:

Then there’s a scheme I’ve heard of in Germany. Essentially it takes banks and mortgages out of the picture altogether, and sets up a long-term contract between the buyer and the seller. The buyer pays rent monthly, the house is essentially placed in escrow, and the buyer ends up owning the house after a set number of years paying rent. I like this scheme because it involves buying a house without any debt — and the buyer can even move house and sublease the property, so long as she continues to make rent payments to the seller. ...

Buying a house slowly, over time, is a great way of building equity without taking on debt — and it’s also a great way of making sure that you’re spending what you think it’s worth to live in a house, rather than speculating dangerously on future property prices. It’s also a great way of giving renters the same kind of emotional equity in their home — and the ability to make changes and improvements — that are generally the domain only of homeowners. Right now, when a lot of motivated sellers are looking to any possible way to move their properties, might be a very good time for these ideas to gain traction.

Felix, Felix baby: the buyer makes monthly payments. If he makes enough payments, he gets the house. If he can take or walk away, it is nonrecourse debt. If he has to take--no matter what the house is worth--this is debt. You can call it Mickey Mouse or Mr. Magoo; if it walks and quacks like debt, it's debt. Oh, Felix, Felix...

Afterthought: there is, inter alia, a huge industry devoted to deluding the acquirer of consumer goods on just this issue. Most of the customers are the most unsophisticaed and gullible, the ones most likely to be deluded by smoke and mirrors. Not usually the finance columnists for major news organizations.