How Rent-to-Own Can Scam You Out of Your Money and Time

You’ve probably heard or seen the rent-to-own advertisements online as a potential solution to not being able to afford buying a home—but you probably haven’t heard how they have been used to trick many people into spending money, time, and effort into a home that never ended up being theirs.

What is rent-to-own?

Rent-to-own is a special kind of agreement where you plan to own the home after an agreed amount of time with the seller. Think of it like leasing a car that gives you the option to buy it right before the lease is over. If done correctly by both parties, the option can be a beneficial deal for those involved. However, there have been some bad apples in the rent-to-own market that have taken advantage of many people who expected to be homeowners.

What are the risks?

Most contracts for rent-to-own homes are much less forgiving than the conventional rent or purchase leases we are used to seeing. People sign contracts for deeds, where the buyer purchases an agreement for the deed rather than buying the deed itself. If the tenant does not fulfill the details of the deed to the letter, the contract is breached and the seller has every right to evict you and keep all the equity you’ve put in the home.

In a 21-year study conducted by the Texas Department of Housing and Community Affairs, less than 20% of would-be buyers became homeowners. Almost half of them had defaulted on their payments and had their contracts canceled.

According to a recent report from The Atlantic, many of the mishaps for being duped in a rent-to-own situation happen from a lack of understanding about the process. Because many tenants think the home will be theirs, they usually “invest” a lot of money into the house to improve it. This is usually the case because many rent-to-own homes are “fixer-uppers,” meaning they are not in the greatest living conditions. The tenants can then miss payments and therefore breach their contracts. What you end up with is a really nice home that your landlord still owns, and a big hole in your pocket.

How to rent-to-own the right way:

• Read the contract. As basic as that sounds, it could not be emphasized enough. Make sure that you understand the parameters you are asked to work in, and understand what the penalties are if you breach them. Some things to make sure are in your contract are: home price, rent cost, and established deadline when you’ll be able to buy. Make sure the contract tells you what percent of the rent will go toward the purchase of the home and how those payments should be made.
• Watch for eviction wording. Make sure the terms don’t put you in a position where you can be easily evicted, especially after having invested in the home through maintenance, improvements, or in equity. If you will be evicted, make sure you are compensated for your contribution somehow.
• Get a lawyer to read between the lines. It goes without saying that most of us are not trained lawyers who know how to read a technical lease contract. Spending the money to have someone look at it and get their feedback will be well worth the investment considering you’re getting into a multi-year contract that will cost you thousands of dollars.
• Keep an eye on home loans. Once you know you’ve reached the agreed-upon time when you are able to purchase the home, be prepared to purchase the property with a home loan. This way you are out of the risky rent-to-own contract and become the owner of the home.

Renting-to-own can be a great option for people who want to be homeowners but can’t compete in their market or qualify for conventional home loans. It can seem like a solid option to reach the American dream, just make sure you’re not signing a contract that will make you live an American nightmare.