rent to ownOwning a home is often defined as the quintessential American dream—but it is a dream that is out of reach for many Americans, especially in the current environment with inflated house prices and soaring interest rates. But, what if a portion of your rent went toward a down payment putting homeownership within reach?  That is precisely the hopeful promise that “rent-to-own” plans are peddling. If done right, the rent-to-own option can be a good deal for all parties involved. However, they can involve serious risks and drawbacks, especially for the renter.

So what are the dangers?

1. Your monthly rent will probably be higher every month.

Landlords, not surprisingly, are not likely to credit part of your rent towards a down payment without expecting extra money. Furthermore, not all of that bump in your rent may be applied to a down payment fund. Here’s an example. Let’s say that the average house rent in your area is $1,900 per month and your landlord is offering a rent-to-own deal for $2,200 a month. It may be that only $200 of the increase is applied as a purchase credit. The landlord may be pocketing the other $100 a month as a fee. Many landlords believe this fee is justified because they are keeping the house off the market for you. Before entering a rent-to-own contract make sure you know exactly how much will be set aside each month in the down payment fund. And, like you should do with any contract, carefully read the fine print.

2. Typically, rent-to-own contracts are much less forgiving than conventional rental or purchase agreements.

If you breach your contract by not fulfilling the details of the agreement to the letter, the landlord can evict you and pocket all the equity you have paid him. In studying this issue over a period of 21 years, the Texas Department of Housing and Community Affairs found almost half of would-be-buyers had their contracts canceled after they defaulted on their payments and in total less than one in five of them became homeowners.

3.  If the deal falls through, the equity toward your savings toward a down payment may not be the only money you lose.

Most lease-purchase agreements have a standard clause which states that all repairs and maintenance associated with the property are the tenant’s responsibility. If you think about it, it’s not surprising that your landlord will not be keen on putting money into fixing up a home they are going to sell soon, so you are likely going to be on the hook to replace a leaky water heater or that furnace pumping out ice-cold air or anything else that breaks, wears out, or needs replacing.  

Many would-be-buyers are willing to make repairs because they presume they will own the home soon and often they specifically chose a fixer-upper because they were on a tight home purchase budget to begin with. But, if you default on the purchase, you will lose the equity you have paid in, and you will also lose every penny you spent making repairs. Caveat emptor (buyer beware) indeed.

4. And one more cost which may catch you by surprise: most rent-to-own contracts require a nonrefundable upfront fee.

Get ready for sticker shock. A common requirement in rent-to-own agreements is an upfront, non-negotiable one-time “option fee” which is typically 1% of the valuation of the home, but can go as high as 5% which is applied to the purchase price of the house. And if you guessed that the option fee is non-refundable, you are right.

 5.  The seller may be dishonest.

Of course not all sellers are alike and most are honest, hard-working businessmen or businesswomen, but not all of them are. In 2016 the Federal Trade Commission (FTC) issued a report warning that some rent-to-own agreements can be shady deals and downright scams. According to the FTC’s report, defrauded rent-to-own tenants have found out too late that:

  • The landlord can’t legally sell the house because they don’t actually own it
  • The seller leaves you with several years of unpaid property taxes
  • The house is in disrepair, or has hidden issues like lead or asbestos
  • Promised fixes aren’t made after a contract is signed
  • The house is headed for or in foreclosure

The benefits of a lease-purchase agreement.

We have advised you of some of the pitfalls of rent-to-own, but there are some benefits, too:

  • If your credit score is too low to buy a house, a lease-purchase agreement gives you time to build your credit.
  • You can avoid competing with other home buyers. At the end of the lease term, if you can complete the purchase, you have a home which may be a big relief given how competitive the home buying market has been in the past few years.
  • You can have the house you love and live in it sooner.

A properly-constructed rent-to-own agreement may be the right answer for both you as a tenant and your landlord. The key takeaway is: If you think a rent-to-own home is your best option, exercise due diligence before buying and have a real estate attorney or a top local real estate agent with rent-to-own experience review the contract before you sign.

 

 

Timothy J. Cuddigan (Founder - Retired)
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Omaha Social Security and Veterans Disability Lawyer With Over 40 Years Experience
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