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It can sometimes be tough for people to buy a house. To make it easier, some seek a path to ownership through a rent-to-own property. It’s not something new.
“It is targeted to low income, would-be homeowners who don’t have great credit or a downpayment saved up,” said Daniel P. Lindsey, then director of the Consumer Practice Group at LAF in Chicago.
LAF, now called Legal Aid Chicago, offers legal aid in Cook County to low income families. Lindsey coordinated the consumer unit, which deals with foreclosure defense, bankruptcy and just helping homeowners keep the lights on.
He has seen the rent-to-own way of buying a house resurge in popularity. It used to be a model in which tenants had an option to buy the house or condo they were renting from the landlord or seller. Most of this was done by individual homeowners.
“With credit being tighter and people not having a large downpayment, rent-to-own has enjoyed a resurgence,” he says. “There are some places in the country where it is really big.”
But not all good comes out of these agreements.
Why rent-to-own deals go bad
Some of Lindsey’s colleagues have filed lawsuits against big companies that are doing hundreds or thousands of these rent-to-own deals. Big cities have a lot of distressed properties, and he has seen a lot of deals in Detroit and Akron, Ohio.
Lindsey says that some of these companies selling rent-to-own homes don’t fix them up. And if they do fix these distressed homes, it is only cosmetic fixes. These companies buy the homes cheap at foreclosure or tax sales. They woo people in with what seems like an attractive rent-to-own contract.
“They find out after they are in that there are back taxes due or some other kind of lien along with city code violations,” Lindsey explains.
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Many of these people are not using a lawyer or not sophisticated enough to do a title search or search anything else about the house or the company they are buying the house from, he adds.
“The idea they will become actual owners of the house is often or most of the time a ploy. They pay 10 to 12 months, and then miss one payment. They get evicted,” he says.
Those tenants had put all their money into this property thinking of themselves as the homeowners. They get evicted and lose everything. That’s typical, he states.
When the deals fall apart
His organization is the one that sees when the deals don’t work out.
“I speculate, occasionally they work out,” he says.
But many don’t, and that’s why Illinois’s Installment Sales Contract Act, effective January 1, 2018, requires written disclosures, a notarized contract and recording of the agreement.
“Very few states have passed these laws. The law doesn’t make it illegal. It’s all about putting it in writing, giving clear disclosure and recording the agreement in the recorder’s office,” Lindsey says.
Predatory sellers sell these contracts, and then unbeknownst to the person down the line, there is another contract because it never got to the recorder’s office.
Lindsey just hopes people realize the old adage that “If it sounds too good to be true, it probably is.”
His office has taken calls from people in these bad rent-to-own situations.
“People call because they are falling apart. People call because they have gotten behind or couldn’t afford the rent payments. Or they found big bad surprises like back taxes or a sink hole in the addition,” he says.
What should someone thinking about a rent-to-own do?
First, Lindsey says to enroll in a pre-purchase homeownership counseling program. Find one offered by a HUD-approved housing counseling agency. Learn what it is like to be homeowners and all the responsibilities. Start saving money so you have a cushion to handle maintenance and repairs. Find out what all your options are for loans that might be out there for your particular situation like being a veteran, a teacher, a rural resident or someone with low credit score.
Second, be proactive instead of reactive. If you want to pursue a rent-to-own type of situation, don’t just call the guy on the flyer stapled to the telephone post. There are some companies that offer programs. Research them online and look at their portfolio. Find any reviews about them or contact the Better Business Bureau about them.
Third, if you do go through with a rent-to-own, you should treat it like you are buying a house. You should have an attorney advising you regarding the paperwork that you are signing. Always check the title for any liens or back taxes.
Fourth, check your state to see if there are any laws regarding rent-to-own. The Illinois law requires a lot of disclosures. Make sure the contract is compliant with the law.
Different rent-to-own structures
Lindsey says many companies offer different styles of rent-to-own. Some have an option to buy. Others want you to pay the taxes and insurance while renting. Some charge a higher interest rate on the loan than most mortgages. In addition, some non-profits, churches and government entities are actually helping people with their own rent-to-own programs. They are working with prospective homeowners.
“But rent-to-own has become somewhat a big business. Some are mom and pop companies who do a few local sales. But now some big national companies have come in and aren’t local,” he says. “You just have to know who you are dealing with.”
The Minnesota Legal Services Coalition states some tips if you are thinking about renting to own:
Get everything written down before agreeing or signing anything. The law does not enforce agreements to buy a house unless they are in writing.
Make sure the agreement states which part of your payments go to rent and which part goes to buying the house.
Go to the county recorder’s office and ask for help to find out who actually owns the home.
Be sure the agreement talks about when the actual sale of the house will be and what the terms are.
Understand whether you need a downpayment at the signing and whether or not you get that down payment back if you do not buy the home.
Watch for scams. Some landlords lost their rental licenses, so they pretend to be selling the home. They don’t really want to sell the house, but they use the rent-to-own agreements to get more money from tenants or to get them to do work on the homes.
