Is Rent to Own Homes a scam?

It's a struggle for many people, especially young couples and people with bad credit, to own a home. As a result, they often rely on a rent-to-own deal to get there.

Presumably, rent-to-own deals are what the name suggests: you rent a property that the owner agrees to sell to you for a specific price in the future. Meanwhile, your rent payments go toward your eventual deposit, and you may have to pay an option-to-buy fee.

Sounds practical, right? But all too often, this setup turns out not to be what it seems, with potential homeowners feeling they’ve been scammed.

According to the United States Federal Trade Commission (FTC), tenants often discover that the “seller” doesn't actually own the property, or that they didn’t pay their property taxes and there's a lien on the house.

Other scams include offering rent-to-own homes in such poor condition that they wouldn’t be sellable otherwise, with issues such as lead piping and asbestos. There have also been cases where the owner guarantees repair work before the rent-to-own contract is signed, only to be unable to see them through. Tenants have even discovered that the house they planned to own was in foreclosure and couldn’t be sold to them as agreed.

“Even with legitimate rent-to-own deals, the devil is in the details," the FTC states. " You might have to pay upfront fees and higher monthly payments than if you were renting. In some deals, if you miss a payment, the deal is off. If you do make it to the end, you might find you’re locked into paying more than the home is now worth, or that you can’t qualify for a mortgage to finish paying off the house.”

According to the search site RentToOwnLabs.com, “Rent-to-own tends to attract inexperienced, first-time homebuyers. Because of this, there are many rent-to-own scam artists out there hoping to lure naive renters into their trap. It can be difficult to identify them, since the industry isn’t subject to much inspection.”

If you're considering renting to own, here are some warning signs to look for:

  • First, abide by the old saying: if it sounds too good to be true, it probably is. If the rent and list prices seem incredibly low, it’s probably a scam.
  • On the other hand, the prices may seem exceptionally high. Scammers do this " to take advantage of those who desperately want a house but cannot secure a mortgage," according to Rent to Own Labs.
  • Another red flag is ambiguous or obscure wording in the rent-to-own contract. This could lead to supposed sellers terminating the contract over some small violation that you didn’t understand in the contract.
  • Additionally, beware of sellers who charge upfront fees, such as an application fee. "It’s more common than you might think for scammers to post listings for nonexistent houses in order to collect money from inexperienced buyers," the rent-to-own site states.

In addition, here are 7 steps you can take to protect yourself from a rent-to-own scam:

  • Do a background check on the owner/seller. Has anyone else claimed to have been scammed by them? Can they offer bank statements that confirm their qualifications?
  • Find out the market price of the home. A real estate agent can help you, though there are also several websites for house evaluation. City governments can inform you as to the house costs, the current evaluation, and real estate taxes.
  • Likewise, contact a different local home leasing agency to ask about rent rates in the area.
  • Have an attorney analyze the wording of the contract. Let the owner know you plan to do this; that way they'll be less likely to include surprise escape clauses.
  • Talk to a trustworthy financial advisor about your eventual ability to purchase a home. Scammers have been known to target people they know will never be able to buy, compelling them to pay higher rental fees then swiping the option-to-buy fee.
  • Contact your local tax assessor to make sure the property is not in foreclosure.
  • Do not pay an application fee without first seeking legal and financial advice.
  • Finally, maybe reconsider if rent-to-own is for you. Instead, as the FTC suggests, “consider saving up your money and working on repairing your credit to buy a house down the road.”

Rent-to-own deals may sound like a good idea, but the last thing a young couple or a buyer with bad credit wants is to discover their struggles just got worse due to a scam. CWP

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