Many people dream about purchasing a new home, but they can’t afford it immediately. Some have problems with their credit score, while others can’t save for a down payment. Lucky for them, rent-to-own deals allow them to eventually purchase the home they would be renting.
A rent-to-own agreement could be a great idea for people who can only manage low down payments or have bad credit scores. If you are tired of renting, it will let you work towards your homeownership and get out of a lease. So, what’s the catch?
Things to Know About Your Rent-to-Own Deal: What’s the Catch With It?
Renting to own often sounds too good to be true. So you might be wondering, are rent-to-own houses real? Yes, this is a real opportunity for potential buyers who need some time to save money for a down payment. These deals look wonderful at first glance but do be careful and do your due diligence.
Rent to own is a lease with the option to buy at the end of the tenancy. It gives renters time — usually from 1 to 3 years — to qualify for a mortgage by building their credit. They are building up purchase equity through their option fees (upfront fees) and rent credits.
One may ask: Are rent-to-own companies legitimate? In rent-to-own deals, the companies or persons who own a property agree to sell it out to tenants for a specific purchase price down the road. The monthly rent is counted towards the down payment.
The catch is that you can’t own the home you rent until you finally make a down payment on a house. Aside from that, there are also other catches to look out for. Read on to learn more.
Top 5 Rent-to-Own Scams to Be Wary Of
There are many different ways renters can be deceived. Here are the most common scams associated with rent-to-own deals:
- The property taxes haven’t been paid by the owner. Check if all the taxes are paid before starting to rent.
- You can’t keep the equity you’ve built if you don’t eventually purchase the home. That means you will lose the extra money in the end.
- The seller is not the true owner of the rent-to-own house. Many scammers advertise vacant houses they do not actually own to collect non-refundable upfront fees. They disappear quickly after collecting the money from naive tenants.
- Promised fixes are not made after signing a rent-to-own contract. Some rent-to-own homes are not worth repairing.
- The home you’re renting could get foreclosed on after a while. Many foreclosures are very cheap because they are often on houses in poor condition. Make sure the house is not in foreclosure before agreeing.
How to identify a Rent-to-Own Scam
Some real estate scams are difficult to recognize. Others are fairly easy to spot. We will go over some of the warning signs that can help you identify a rent-to-own scam.
1. You Are Skeptical About the Landlord or Seller
The US Federal Trade Commission asserts that many tenants discover supposed sellers don’t own the advertised properties indeed. Perhaps you have a gut feeling that the seller doesn’t own the home or property advertised online.
Even if you’re not skeptical about the seller you need to run background checks on the home and company/landlord too. That will help you identify the fraud transactions and tax claims on the property/house if any.
2. The Rent-to-Own Deal Is Too Good to Be True
Beware of sellers who promise fetch rewards. That may include misleading offers like extremely low home prices and rent. Some scammers make claims to provide financing without any money down. If the rent-to-own deal leans too much in your favor, be sure to question the authenticity of your seller.
3. Unreasonably Overpriced Sales Prices
Likewise, sales prices can be incredibly high. Scam artists often list rent-to-own houses at very elevated prices. In this way, they prey on the vulnerable people who can’t get a mortgage and want to move into a home immediately. Steer clear of homes whose listing prices aren’t close to real market value.
4. Additional Fees
Beware of rent-to-own sellers who demand extra fees besides option fees, such as application fees. Some scammers try to charge this “fee” to show the house or property. That’s just another way to pick up the cash from first-time homebuyers.
5. Overly Strict Contract Conditions
You might be expected to follow very strict conditions when buying a home. For example, some mortgage lenders may require you to pay too high a mortgage rate. Before you enter the transaction, consider a few different options to make sure your interest rate on a mortgage is good and fair.
6. Vague or Confusing Contract Wording
Ambiguous or confusing contract wording is also one of the red flags to watch out for. Such a lease contract allows the seller to cancel it for minor difficult-to-spot infringements. For instance, if you’re late on one payment, your seller can void both the option fee and rent credit.
Hire an attorney to check if the rent-to-own contract has any discrepancies before signing it. Ask him to interpret vague wording as well as difficult legal words. You will reduce the risk of losing extra money toward your purchase by understanding the terms and conditions of your contract.
Related: How does rent to own work?
How to Avoid Rent-to-Own Scams and Protect Yourself
Here are a few additional tips for potential renters on how to protect themselves from scams:
Know all details of your rent-to-own contract.
- Ascertain the real owner of the home by checking out the seller’s credentials.
- Discover potential health hazards and physical problems that need repairs.
- Compare the prices of similar rent-to-own homes by checking the current market value.
- Hire a lawyer to analyze your contract and interpret the confusing wording.
- Ask the local tax assessors to see whether the house is in foreclosure or not.
- Consult reputable financial advisors before buying a house.
Stay Safe from Home Rental Scams
Rent-to-own homes are particularly attractive to first-time home buyers. Since those buyers have no experience in purchasing a home, they don’t know how to identify rent-to-own scams. Even the legitimate rent-to-own arrangements can be scammy or risky, so remember to pay attention.
Related: Pros and cons of rent to own!