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Beware of Rent-to-Own Home Scams

This article was written as a response to the question: How do rent-to-own homes work? What are the best ways to find and evaluate them?
Beware of Rent-to-Own Home Scams. Learn what you need to avoid real estate pitfalls.

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?

If you appreciated this article, you might also appreciate: 

Thank you.

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Comments (7)

We are trying to sell our home FSBO right now and I get contacted by people wanting to do rent to own or land contract every week. We want no part of it on the selling end either. Thanks for the good information

Excellent information

Kenneth Cameron Sr.

Why can they do this to unspecting people like us. We had a house (we was

ill adviced to sell it). Then the market went up, and the people that bought

the house did nothing and got (2) two times as much. the same house we

sold for $147,000 was just sold for $380,000

We can't climb stairs (Ihave had strokesand the wife has bad knees) we are on SS Retiement SO we thought that rent to own would be the best thing for us. BUT THAT OUT THE WINDOW THANK GOD FOR PEOPLE LIKE YOU!!!!!!!!!!!!!!!!!! KEN AND SUE CAMERON SR.

Dear Mr. and Mrs. Cameron, I am so sorry to hear about your stroke and your wife's bad knees. It's dreadful that so many good people are having so many problems right now. I wrote a follow-up article to this article. It reiterates many of the same facts but also stresses what questions you should be asking is you think a rent-to-own is your best option for home ownership. If you're interested, this is the link: http://factoidz.com/avoiding-renttoown-home-scams-what-is-legitimate/ I have known some people in a predicament similar to your own. One person was able to move into a nice apartment and rent his home to some excellent renters. This has worked out well for them. Once the economy is better, he'll sell the home and use the money to buy a condo of his own. The other person has had extremely bad luck finding good renters. Some have trashed their home (which happened to me when I rented a home), most are unable to pay the rent on time. This means he's not only having to pay for his own rent but also the mortgage on the house he's renting to others, even though he doesn't get his money on time to make the mortgage. I wish I had some excellent advice I could give you. I don't know if your current situation is manageable. There may be some legitimate places to help you but there are so many shady ones - or ones having financial difficulties- that I would talk to an attorney before you make any big decisions. As I don;t know your exact situation, I don't know if you would qualify for a reverse mortgage of even if that would be a good idea for you personally. Everyone's needs are different and there are still some pitfalls many people who get reverse mortgages fail to consider. This article may give you some information to consider before talking to an attorney or a specialist: http://factoidz.com/reverse-mortgage-beneficial-home-equity-loan-for-seniors-know-the-benefits-and-drawbacks/ I hope this helps. Please keep me informed regarding your situation. Take care, Rachel Kiernan

Kenneth Cameron SR.

"

'Why' do do the people do this, when they know it is a scam!!! A old man

told me one time if it's sound to god to be true then it's not. ENOUGH SAID.

THANK GOD FOR PEOPLE LIKE YOU. Ken & Sue C.

They do it when they care more about making a quick buck than they do their neighbors. They always do it when they think they can get away with it. I don't know how they look themselves in the mirror. Take care, Rachel

Here is a review about a grea site to make a passive income: http://expertscolumn.com/content/expertscolumn-review-good-passive-income-opportunity-expertscolumn-scam-or-legit I recomed you joining it it has brough me easy earned money and it gives you the freedom to republish your work from other sites too. Check it out you won’t regret it.

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