Warnings & Scams
If you are at a place in life where you no longer wish to rent but are not ready to purchase a home, rent-to-own is an intriguing and potentially effective option. After doing your due diligence and researching the benefits of rent-to-own
you maybe be ready to make the jump. But, before you do, one must also consider the potential pitfalls of rent-to-own properties to ensure you don't fall into them. Things aren't always what they seem and sometimes the buyer must beware!
Before you enter into any contract negotiations to purchase a rent-to-own home, there are a number of critical things you should consider. First off, you should check the seller's credit report. Yes, you can do this, and you should. Checking it will let you know whether or not the seller is in financial trouble which is a key warning sign. Look for delinquent accounts or a large amount of outstanding debt. If a seller is in financial trouble that may not bode well for your long term ability to purchase the home. Keep in mind that a seller must continue to pay their mortgage or risk bank foreclosure.
Also, before you sign an option agreement make sure it is clearly stated WHO is responsible for maintenance and repairs. You do not want to be responsible for putting a lot of money into a home that is not even yours (yet). Learn more about the process by reviewing our Rent-to-Own Buyer's Guide
"What If" Scenarios
Before agreeing to purchase a rent-to-own home you should look at all potential issues. This means examining and running through a multitude of "what if" scenarios. Here are just a few to get you thinking.
What if the seller loses the property?
This could happen for a number of reasons. Even if their financial history was fine during the initial credit report life changes and things happen. If the seller is unable to make the mortgage payments, loses their job, goes through a divorce or any other scenarios occur that require them to sell the property, what do you do? Make sure this is covered in any contract. In most cases you will lose any extra rent paid, the property you have been living in, and in most cases any chance of purchasing the home. Buyers need to beware that until the title is in your name, the home is not yours by law.
What if the seller backs out?
At the end of your lease option period or anytime before the seller CAN back out (if negotiated). This means that you may lose all above market rent money you paid. The seller may do this if the market appreciated and the property is worth more now. Or sometimes sellers are just unscrupulous. This action is of course illegal but if you do not have financial resources to hire a lawyer you won't be able to do much against a shady seller.
What if the Market Declines?
What will you do if the market declines and you are purchasing your rent-to-own home for MORE than it's worth? You will still be in a contract to pay the higher price. In this scenario you have the option to walk, but you will lose any portion of rent that would have otherwise gone towards your down payment. This is where serious evaluation of the house, the neighborhood and everything else comes into play. You must stay on top of the trends and be diligent about it.
Beware of Fraud
If you Google "rent-to-own fraud" you will likely come up with a surplus of articles warning you about rent-to-own purchases. These warnings are often times warranted. Housing scams are possible, and are more common than you might think.
One particular form of fraud is when scammers post fraudulent listings on sites like Craig's List and Zillow. Criminals pose as owners of the home and when prospective buyers contact them they send a rental application that includes requests for personal information such as address SSN, birth dates and more. These are all items that make it easy to steal someone's identity. If you feel this could've have happened to you, make sure and check your credit report now. Look for any irregularities or items that aren't yours.
Another possible form of fraud occurs when a website asks you to pay a "fee" before seeing all of their potential rental properties. These sites list homes that aren't really rent-to-own, and in some cases aren't even properties for sale. The buyer then begins attempting to contact people only to find out they have been scammed.
You can avoid this scenario by following a few key suggestions. Never give your credit card information without ensuring that the website is, in fact, legitimate. Perform a Google search on the company and read real user reviews. Also, never send personal information out through email on an online site. Make an appointment directly to see the home, meet the potential seller, and then decide whether or not to fill out appropriate paperwork.
Rent-to-own scenarios are not always perfect, and can have potential pitfalls. However, don't let this stop you from possibly renting to own your next home. Find a trustworthy seller, make arrangements that are secure with the help of a trusted lawyer and real estate broker, and consider all the possible scenarios and "what ifs". With any luck you may be on your way out of your rental and into your very own home!