Beware of Rent-to-Own Home ScamsFitness Equipment
With foreclosures at an all-time high and a poor economy, many people are looking into rent-to-own programs for their own piece of that American dream. Unfortunately, many if not most of these programs are simply another way of suckering people who have already been knocked down to the bottom rungs and appear to be nothing more than another predatory practice. I have looked into about a couple dozen rent-to-own programs, both for myself and for my friends and in two different states. Every one I have seen makes a request for a sizable down payment along with a higher amount of rent, of which a partial amount is applied toward the purchase price of the home. Usually one of the selling points of doing this is that the price of the home is locked in and cannot go up while you are living there. From this point, you normally have 1-2 years to clean up your credit and apply for a mortgage on the home. Here are the catches which they won't automatically tell you unless you ask and read the (very) fine print.
- The assumption is made that the value of the house will go up in those 1-2 years. What you should have noticed is that, should the economy start a decline, the value of the home will usually go down. Not only may you not want a home which has deteriorated in price, you will probably not be able to get a mortgage on that asking price. If the person from whom you are buying the home still owes X amount of dollars on his mortgage on that property, he may not be able to come down on the price.
- Which brings me to point #2: The rent-to-own agreement is between the landlord and you; The banks may not be involved at all. If he has financial difficulties and ends up in foreclosure on "your" new home, your only option is to appeal to the bank (good luck on that) or to try and sue the landlord. If he's broke or bankrupt, your chances of getting anything are pretty dismal. Just as the news has been filled with stories of renters who have been surprise-evicted because their landlords foreclosed on the properties they were renting, this can (and I've heard, has) happened to those doing rent-to-own. In this case, insult is added to injury as you would have put down a large down-payment and would have also been spending more on rent toward that purchase price.
- Which brings me to point #3: Though your rent will be higher as X amount of dollars of that rent is applied to the down payment, what I have personally seen in almost every case is that the overall rent amount, less the down payment, is still higher than what you would otherwise be spending. As an example: Say you are spending $1400 on a rent-to-own property. $300 of that goes toward the down payment, which leaves the remaining $1100 as your rent price. However, homes similar to yours in that neighborhood normally rent for $800-$900. You are being over-charged in that rent amount simply because you are wanting to own that home.
- Assume you have made your payments on time for those 1-2 years but cannot get a mortgage - perhaps because you were unable to improve your credit or for any other number of reasons. Most of the contracts I've seen have clauses stating that your original down payment will not be returned to you, nor will the extra money you have been spending in rent toward the purchase price of that home. I have seen the same homes get re-listed as rent-to-own time and time again, simply due to this reason. I can assure you that these landlords are perfectly happy making a profitable income from both their renters down-payment and in those extra rental fees. This shouldn't be legal but it appears to be - at least in the last two states in which I have lived.
Now for a little common sense regarding this whole thing: If you must get your credit in decent shape in order for you to take out a mortgage on that rent-to-own, why not spend that down payment money fixing your credit before you look into buying a home. That way, you can actually get the home of your dreams rather than pick through whatever is being offered as a rent-to-own - and inherit whatever problems that home may already possess. With all of the foreclosures and what are referred to as "fire sales" on new homes, you could probably get a better deal on a better home. Not to mention, with good credit you could qualify for some excellent rates, perhaps even without a down payment. FHA has some excellent mortgages for first-time buyers as well. On a personal note, I am speaking as someone who is recently divorced with a host of major medical issues who worked for two jobs which bounced paychecks and another which downsized me. To say that my credit has done a kamikaze would be an understatement. However, it isn't impossible to improve your credit. I have had some luck working with one credit-repair company and have had more luck simply writing my creditors with the request that, once I completely pay off those debts, they would agree (in writing) to completely remove that negative mark from my credit report. In a strong economy many creditors agreed to this. In this economy where so many lenders are desperate to get back anything...... just try it. I detest renting and have had 3 of my own homes. I will own another home in the near future, after I have repaired my credit to the point where I can get a prime mortgage rate. It is not impossible. I'm simply grateful I didn't, in desperation, sign one of the many rent-to-own contracts which I looked into. Final word of advice: This isn't to say that every single rent-to-own option is a scam. You may have a friend or someone whom you know who is willing to sell you a house as a rent-to-own and be more than willing to work with you. Still, horror stories abound. In all honesty, I looked at about 2 dozen rent-to-owns, both from individuals and from companies. There wasn't one which appeared honest and had fair policies in their fine print. I would check out http://www.buzzle.com/editorials/12-2-2005-82927.asp as a start or do a google search for this if you need more evidence. I would avoid LLCs (Limited Liability Corporations) just for that reason as you may have little if any financial recourse should they not be honest. Good luck.
As a continuation of this article, I have also published: Avoid Rent-to-Own Scams: What is Legitimate?
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