The Housing Scene

Rent-to-Own a Dangerous Choice

New York’s Department of Financial Services recently sent a consumer alert to state residents about the dangers of rent-to-own deals, but the advice applies to everyone considering that path to homeownership -- not just those in the Empire State.

These arrangements rarely work out for the wannabe owners, but they are windfalls for the seller-landlords. Granted, some rent-to-own contracts are fair and equitable. But most are just backdoor deals that often prey on people who don’t have a big enough nest egg, or a high enough credit score, to meet normal lending standards.

One seller freely admits that half his tenants fail to meet the criteria set up in his contracts. And real estate guru John Reed reports that as many as 95 percent of all rent-to-own deals don’t make it to the finish line.

And if the deals fall through, the sellers reap the rewards. They get to pocket whatever overages the tenant might have paid to build equity in the house and use as an eventual down payment. Better yet, the sellers get to keep the house and put it back on the market for the next unsuspecting chump.

The hook, of course, is that the landlord will sell you the property a few years down the road, giving you time as a renter to build up enough cash for a down payment or to raise your credit score. But too often, the tenant fails to do one or both of those things before the lease expires, and ends up worse off than before.

Although rent-to-own programs “appear to offer a path to homeownership,” New York’s Superintendent of Financial Services Maria Vullo says in her alert, “these arrangements may impose harsh terms with little or no consumer protections.”

Reed agrees. By making a lease option that is likely never to be exercised by the tenant, he says, some sellers are pocketing thousands of dollars of the tenant’s money while “leaving the tenant out on the street with nothing -- no benefit from having paid all that extra front money and rent.”

All of the following points should be covered before you sign anything:

-- Price. The rent-to-own lease should spell out a fair selling price. From the tenant’s point of view, that would be what the place is worth at the time of lease-signing. But from the landlord’s side, the price would be its worth when the buying option is exercised. So find a middle ground, and set it now.

If the landlord is adamant about waiting to set a price until you use your option, so that he or she can take advantage of any appreciation, then at least agree -- in writing -- how that price will be determined. Maybe you can agree to use a certain appraiser, or each hire your own. Then, if there is a difference between the two valuations, you agree to split the difference.

-- Timing. Does two years, the typical length of a rent-to-own deal, give you enough time to improve your credit score and save for a down payment? Probably not. So make the lease as long as possible: five or six years, perhaps.

-- Rent. Be sure the rent is fair. Often, the seller will charge more than the going rate, under the assumption that you will eventually buy the place. Higher rents are supposed to compensate owners for keeping the house and paying the mortgage longer than if they had sold the place outright.

Some sellers also will charge an overage to be credited to your account as part of your down payment. So try to negotiate on the rent, and make certain that at least part, if not all, of the overage comes back to you if you fail to exercise your option to buy.

-- Maintenance. The lease should spell out who’s responsible for maintenance and improvements. Generally, the landlord is on the hook for fixing a balky furnace or malfunctioning air conditioning unit. But if you want to undertake a major kitchen remodel, it will probably be on your own dime.

If you can’t persuade the landlord to chip in now on something that will add value to the property, then try to get them to credit your account for some or all of the cost of the improvements when you move from tenant to buyer -- or when you move out.

Leases are required to provide basic consumer protections, but some rent-to-own outfits claim to offer a hybrid agreement -- part mortgage, part lease -- that doesn’t follow the same rules. Beware, says Vullo: “Before considering one of these agreements, consumers should carefully consider whether a traditional lease is a better option.”

Finally, check your state’s laws about the condition of rent-to-own properties. New York has found that some contracts impose the obligation to make repairs (and incur the substantial costs) solely on the tenant, whereas state law places the onus on the landlord.

New York tenant-buyers have certain legal rights if they pay for work that improves the house, and then fail to buy it. One comes under the common-law doctrine of “equitable mortgage,” which holds that tenant-buyers cannot be evicted if they fall behind on rent. Rather, they are entitled to the protections afforded under a foreclosure proceeding, because they’ve accumulated equity by paying rent and improving the property’s condition over time.

The law in your state may be different, so do your research and know your rights.

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