Caution: Why Rent-to-Own Is Often Too Good to Be True

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Aspiring homeowners with lousy credit, no nest egg savings for down payments, or just plain low incomes may have a tough time purchasing a home—particularly as buyers with deeper pockets compete for the limited number of properties for sale.

That’s why it may be so easy for them to be lured in by the promise of rent-to-own properties—a fast-growing but slightly sketchy segment of the consumer housing industry. In these sorts 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 are often higher than local rents, because tenants are essentially buying the property from their landlord over time. In many cases, they’re also responsible for making repairs on the homes.

The problem is that if a deal sounds too good to be true, well, we all know by now that it probably is.

Here’s the rub: Many renters in these arrangements never become homeowners—despite years of shelling out for repairs and extra-high rents, according to a New York Times investigation into Vision Property Management. The Columbia, SC–based firm is one of the largest firms in the field.

The deals often don’t come with consumer protections and may not even be enforceable in certain states. And it’s often the cheapest homes, those designed to appeal to the worst-off buyers, that come with 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 could be an individual renting out just one property or a large company) even owns the property, he warns.

Sometimes landlords will try 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 on time 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 interested in rent-to-own propositions would be an owner-financed deal, says Cassandra McGarvey, a real estate attorney with Houston-based Sanders Willyard. They’re very similar to rent-to-own deals except the tenant gets the deed to the property.

Plus, their credit scores can go up if they pay on time. And they can’t be evicted as easily if they fall behind on payments as the home would need to go through foreclosure proceedings.

The problem for tenants is sellers are often 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 home to another buyer. Many title insurance companies would be hesitant to go through with a deal with a new buyer if they were aware of a rent-to-own arrangement, she says.

They should also have a home inspection performed so they understand what condition the property is in—and how much money they can expect to spend on 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 responsible for paying property taxes, homeowners association fees (if there are any), and insurance. They should also put in writing when the deed will be delivered, assuming everything goes well, and who will get the insurance check if the home is destroyed by something like a fire.

With all of these potential problems, McGarvey advises tenants to steer clear of the arrangements. “They are designed to take advantage of lower-income, less credit-worthy individuals,” she says.

The post Caution: Why Rent-to-Own Is Often Too Good to Be True appeared first on Real Estate News and Advice - realtor.com.

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