Avoiding Rent-to-Own Home Scams: What is Legitimate?
This is a response to the question, “Rent To Own Deals...are There Any Who Are Legitimate?” It is written as a continuation of my original article, "Beware of Rent-to-Own Home Scams."
There may well be some rent-to-own businesses that use an honest business model. The important thing is to ask the right questions and not allow yourself to be pressured into making a decision simply because of your desire to own a home.
Here are some things to consider:
- If you are unable to get a mortgage during their time frame (which is normally 1-2 years after signing the contract with them), will they return to you your down payment/deposit? If the answer is no, walk away. So far, I have yet to find a place that will return that down payment, whereas that payment is often enough to qualify for a regular mortgage. The difference is, the mortgage company won't keep your down payment if they are unable to finance you.
- How much of your monthly rent is going toward the purchase of the home? Remember, if you can't get financed, this money will generally not get returned to you.
- Of the actual rent money (the amount you are paying less the amount that goes toward the purchase of the home), how does the rent compare to other similar homes in your area? For example: Assume your total rent is $1600 per month. Of that, $300 per month is going toward the purchase of the home. This means that $1300 a month is just rent. If other comparable homes in the area are renting for around $1300 a month (or hopefully more), this is fine. If other homes are renting for $1000 a month or less, you're blowing at least $300 a month for no reason. Don't let yourself get taken for a ride.
- Rent-to-own businesses will often stress that doing business with them locks in the price of the home so that it cannot go up while you are trying to get it financed (during that 1-2 year timeframe). This assumes that you are in a real estate bubble and the market will only increase. What will happen if that bubble bursts (as just happened) and the price on the home decreases, sometimes substantially? You will probably be unable to get a mortgage for much more than the current value of the home, which means you will probably be unable to get any mortgage at all on that home. They need to have a clause, in writing, discussing what will happen if the price decreases. Remember numbers 1-3. If you cannnot get financed, you may be losing a large some of money.
- Just as if you are purchasing a home outright, you need to know about any repairs that the home needs, inspections to be made, what the landlord will cover and what you will pay for.
- Does the landlord own the house outright or is he still paying a mortgage? If he is still paying a mortgage, what will happen to your down paymenet / rent if he falls behind and loses the home in foreclosure? Sounds scary but this does happen - and you may have little recourse as you are dealing with an individual rather than a bank or financial institution.
- Anything they tell you needs to be put in writing. Do not assume that by explaining something which is not abundantly clear in the contract, that they are telling you the truth or even necessarily understand what is in their contract. Sales people are not always the most informed about the legality of all clauses in a contract. It's usually a good idea to hire your own attorney. If you're going to be spending potentially tens of thousands or hundreds of thousands of dollars, what's a few hundered to make certain your interests are secure?
Remember, a legitimate landlord will understand that offering a rent-to-own home may help him sell his house in a poor economy. Even in a better economy, a legitimate landlord understands that he is still making money on rent while you are trying to purchase his home. He will not want to keep collecting - and not returning - down payments on a product which is never delivered on top of charging unrealisiticly high fees for rent.
As a last resort, always keep in mind that the money being used for a down payment on a rent-to-own home could also be used to pay off creditors and improve your credit. If you are smart, you can usually work out a deal that by paying the full amount due, your creditors will agree in writing to remove negative marks from your credit report. Once you have good credit, you will not need to use a rent-to-own business and will instead have more flexibility in picking the home you really want rather than choosing only from the homes that a rent-to-own business has available. It may be a good idea to talk to a mortgage company first, have them discuss your credit with you and what you would need to do before they can offer you a mortgage. Hiring an attorney who specializes in real estate and/or mortgages is almost always an excellent idea.