The Most Common Rent-to-Own Scams—and How to Not Get Taken for a Fool
By M.J. Grenzow
You may have seen ads for rent-to-own homes, and wondered if they’re your ticket to home ownership. But, is a rent-to-own deal too good to be true? In other words, are rent-to-own homes legit?
At first glance, rent-to-own deals can seem like a great idea. If you’re tired of renting, but have a shaky credit score or lack a sufficient down payment, a rent-to-own agreement can allow you to get out of a rental and work toward homeownership. In rising housing markets, when you’re in a rental, the prices can go up faster than you can save for a down payment. A rent-to-own agreement, on the other hand, can help you pin down a purchase price at today’s prices. The premise is simple: You pay monthly rent, some of which goes toward the purchase price of the home, and at the end of the set term, you’ll own the property. Sounds perfect, right?
But beware: The rent-to-own landscape can be a minefield of scams and deceptions designed to take your money—and leave you in the dust. Here’s everything to know about rent-to-own scams, plus legitimate rent-to-own programs.
Are rent-to-own homes legit? Common rent-to-own scams There are several ways you can be swindled with a rent-to-own scam. One of the most common involves scammers who purport to sell property that they don’t actually own.
“People advertise a house that isn’t theirs, and pretend to be the owners and collect upfront fees from the tenant,” says Martin Orefice, the founder of renttoownlabs. To pull off the ruse, scammers find a vacant house that’s for rent and list it online with their own contact info.
“Then they meet the tenant at the rent-to-own home, pretending to be the owner, and ask for an upfront fee or nonrefundable deposit to hold the home,” Orefice says. “Once they collect the money, they disappear.” Shady, right?
Even if the seller actually owns the rent-to-own home, the deal can be stacked against you. Amy Hebert, a consumer education specialist at the Federal Trade Commission, says unsuspecting people can also be scammed in the following ways:
The house is in way rougher shape than they were told (e.g., asbestos or lead is present, or the house has mold or water damage).
The house is a foreclosure.
The agreed-upon purchase price of the rent-to-own home is far above its fair market value. Assuming you could eventually get a mortgage on the home, you may find yourself owing more on the mortgage than the rent-to-own home is worth. That’s called being “underwater” on a loan, and no matter how badly you want your own home, it’s not a good situation to be in.
Legitimate rent-to-own programs: How to protect yourself from rent-to-own scams Sure, legitimate rent-to-own programs exist—you just have to know what to look for. Here are some simple tips to help you avoid being taken by the rent-to-own process.
Find out who really owns the property:
Before turning over any option money or rental payments, ask for documentation showing that the person owns the house—a tax bill, for example. In many cases, the owner information is available online, so you can even check it out yourself. Before you enter into a formal contract, you should also get a title report from a title company. This will ensure that the seller owns the property and can legally sell it to you.
Know every detail of your contract:
Make sure you understand every detail of any rent-to-own contract before signing. Many rent-to-own contracts allow for stiff penalties if the buyer is late or misses a lease payment, and some contracts may even become void. That means the buyer forfeits any claim to the property and any down payments and other money they’ve invested.
You should also be clear about any option fees and other costs, and what happens if anything goes wrong during the lease term, such as the buyer not being able to get a mortgage loan at the end of the lease. “Consumers should review—or have a real estate attorney review—the agreement before they sign,” says Frank Dorman of the Office of Public Affairs for the Federal Trade Commission. “It can be very difficult to extricate yourself afterward.” Know what could be wrong with your property: Just as an attorney can help you understand contract wording, a home inspector can help shed light on any potential physical problems and health hazards in your home. Most rent-to-own agreements will include some type of contingency for a professional evaluation. Consider it money well-spent: A professional home inspection can uncover all sorts of needed repairs that are not out in the open. This can give you leverage to negotiate a better price or terms, or even just alert you to possible repairs down the road.
Compare the purchase price of similar properties:
If you’re a renter looking to become a homeowner, and a lease-to-own deal seems like your only hope, it’s easy to pay too high a sales price for the property. It’s better to keep making rent payments for now than to overpay for your house. If it wouldn’t be a good price for a cash-out home buyer at that price, the rent-to-own home is not a good deal for you as a potential buyer, either.
Consider buying a home instead:
Salespeople touting renting-to-own deals are banking on buyers believing that they cannot buy a home, usually because they think they have bad credit and not enough down payment, and therefore can’t qualify for a mortgage. Before you decide that’s the case for you, talk to a real estate agent in your area. Agents can show you housing and help you see what’s available. They may even direct you to a good lender who can tell you about your mortgage options. You may be surprised at how soon you can get a home loan and become a homeowner; for example, if you build your credit score, try to save up a down payment or check out home down payment assistance programs in your state, and apply for a mortgage.