Aspiring homeowners with lousy credit, no amount of money for down payments, or just plain low incomes could have a difficult time buying a home-particularly as buyers with deeper pockets compete for the small selection of properties for sale. That’s why it may be so easy for them to be lured in through the promise of rent-to-own properties-a fast-growing but slightly sketchy segment of the consumer housing market. In these types of programs, tenants who can’t qualify for a mortgage will make monthly payments on a home they’re renting with the promise of owning it after a set number of years-usually between five and 20 years of payments. The payments will often be higher than local rents, because tenants are essentially purchasing the property from their landlord eventually. Oftentimes, they’re also liable for making repairs on the homes.
Why Rent-to-Own Is usually Too Good to Be True
The thing is that when a deal sounds too good to be true, well, it’s well known by now that it probably is.
Here’s the rub: Many renters within these arrangements never become homeowners-despite years of shelling out for repairs and extra-high rents, reported by a New York Times investigation into Vision Property Management. The Columbia, SC-based firm is probably the largest firms in the field.
The deals often don’t include consumer protections and may not even be enforceable in certain states. And it’s often the cheapest homes, those intended to attract the worst-off buyers, that include quite possibly the most pitfalls.
“It usually doesn’t end well for anyone involved,” Kevin Koel, a real estate attorney with Capital Farm Credit, in Bryan, TX, tells realtor.com®. The rent-to-own business “is rife for people to get taken advantage of.”
In the worst-case scenarios, there are no guarantees that the landlord (who happens to be an individual renting out just one single property or a large company) even owns the property, he warns.
Sometimes landlords will attempt to evict tenants early to get out of the deals. “They’ll find some way to default you so they won’t have to honor the contract,” Koel says.
And even when tenants in these arrangements make their payments when they’re due each month, that typically doesn’t give their credit scores a corresponding boost. That’s because sellers often don’t report the payments to credit bureaus, he says.
A better plan for those thinking about rent-to-own propositions might be an owner-financed deal, says Cassandra McGarvey, a real estate attorney with Houston-based Sanders Willyard. They’re very much like rent-to-own deals except the tenant gets the deed for the property.
Plus, their credit scores can go up if they pay punctually. And they can’t be evicted as easily once they get behind on payments as the home will have to go through foreclosure proceedings.
The problem for tenants is sellers are frequently reluctant to transfer the deeds to these super risky buyers.
If tenants can’t score an owner-financed deal, she recommends they have a record of the rent-to-own arrangement on the deed of the property. This provides them with some measure of protection if their landlord decides to sell the house to another buyer. Many title insurance companies would be unwilling to proceed through with a deal with a whole new buyer if they were aware of a rent-to-own arrangement, she says.
They should also have a home inspection performed to make sure they know what condition the property is in-and the amount of money they can be ready to invest in repairs.
“If you’re buying a house with major foundation problems, it could cost you $20,000 to $30,0000,” McGarvey says. “You want to make sure you deduct that $20,000 to $30,000 from the price of the house.”
And finally, tenants and landlords need to hash out who will be liable for paying property taxes, homeowners association fees (should there be any), and insurance. They need to also put in writing when the deed is going to be delivered, assuming everything goes well, and who’ll receive the insurance check if the home is destroyed by something such as a fire.
With all of these potential issues, McGarvey advises tenants to steer clear of the arrangements. “They are designed to take advantage of lower-income, less credit-worthy individuals,” she says.
There are several ways to avoid a rent-to-own situation. Nick & Cindy Davis work with several lenders who can advise you on exactly what you need to do to qualify to purchase a home. It may take a little time, but the money you throw away in rent-to-own scenario is money you can never get back. To get started, you can call us at 813-300-7116 or simply click here and we will provide you with the contact information for someone who can assist you.