In the world of real estate, there is a group of people that fall in-between the line that divides homeowners and renters. These are the “rent-to-own “people, the ones who chose to rent the house that they may eventually buy or have the first option to buy in the future.
For lack of better choices, people who choose this housing arrangement are usually the ones who have poor to no credit and/or cannot acquire funds for a down payment or a mortgage loan.
At first, the idea of rent to own sounds promising. Renter cannot qualify for a mortgage loan, but intends to buy a house someday. So renter finds another option, there’s a house available for rent, and then part of the rental payments become credits for buying the house during the time of the lease.
In reality, this type of transaction leaves a blurred line in rights and responsibilities of the landlord and the renter-buyer. In a report done by the National Consumer Law Center, contracts of this kind are “toxic transactions”, deceptive, and predatory for lower income buyers.
No standard or universal contract forms
Some states allow rent to own, while some do not. The lack of a governing law and undisclosed information regarding rent to own housing transactions is the cause of confusion and disappointment to renter-buyers.
No proper disclosure / appraisal
Most rent to own transactions do not involve real estate agents, so the renter-buyers are more likely to fall into a predatory scheme / trap. Home inspections are rarely done, and the house is provided as is, defects and all. Oftentimes, the renter-buyer pays more than the actual value of the home.
Maintenance is shouldered by the renter-buyer
With this kind of arrangement, the would-be occupant is usually left to take charge of the repairs needed to make the home habitable. The undefined status of renting and future ownership leaves the renter-buyer to believe that he/she should be responsible for the upkeep.
The status of the property is uncertain
In a rent to own transaction, the future status of the property remains uncertain. While the renter-buyer pays regularly, he/she is still at the mercy of the landlord’s (seller) financial capacity. If the landlord fails to pay the mortgage, the house may be foreclosed and the renter-buyer loses the option to purchase the home.
There are many factors which can make the landlord lose the house at any given time, it can be due to tax issues, divorce settlements, lawsuits, or foreclosure.
Building code violations
Some houses have been on the market for so long before it becomes a rent to own home. One of the reasons could be structural defects that are too costly to fix. Hence, properties who do not meet the building code requirements are usually the ones sold through shady transactions.
In an article reported by the New York Times, some people have bought rent to own homes only to discover its unresolved issues in the end. One home had a standing vacancy order from the city council, while another home had no furnace. Another rent to own home was sold without a heating system, water supply, and a proper sewage installation.
Money will be forfeited
Renter-buyers pay extra money on top of the rent, like a small portion of a down payment. It gets credited to the purchase price of the house once the renter finally decides to buy. However, that same extra money is non-refundable, and will be forfeited once the renter changes his/her mind.
There may be trustworthy landlord/sellers out there, but the risks still spell a huge difference between rent to own and standard real estate transactions. In a standard home buying process, the buyer is protected against possible scams, because every step is regulated by the law.
People who are interested in dealing with rent to own agreements should think twice and explore other options. It may take time to build a better credit score, but it is better to wait than to fall into the unfair practices that come with most rent to own transactions.
There are loan opportunities available for low-income buyers, and most local agents are acquainted with specific programs and lenders. Information is the key to one’s future home. If you’re considering a rent to own, please call me today to explore the range of options available.
Source for NY Times Article: https://www.nytimes.com/2016/08/22/business/dealbook/rent-to-own-homes-a-win-win-for-landlords-a-risk-for-struggling-tenants.html