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Rent-to-own can be the perfect arrangement for some individuals, as it allows people who are not quite ready to buy a home reap some of the benefits of homeownership. A typical rent-to-own agreement has a one year span, allowing you to purchase your home at the end of the lease term, and often applies a portion of your rent payments to your possible future home purchase. A rent-to-own contract can feel like the perfect fit for someone who wants to spend a few extra months improving their credit or saving for a down payment before they apply for a mortgage.
There are a few fundamentals to understand about a rent-to-own agreement:
- You pay a one-time, nonrefundable option fee that’s often between three and five percent of the home’s price.
- You pay higher-than-average monthly rent.
- A portion of your rent may be applied to your home purchase.
- You may have a lease-option (where you don’t have to buy the home at the end of the lease) or a lease-purchase (where you have no flexibility and have to buy the house).
- You may have to split or pay for maintenance costs.
- You may have to agree on the home’s price at the beginning of the contract.
You might be wondering why more people don’t pursue rent-to-own. Unfortunately, rent-to-own does come with some potential downsides, including the risk of losing money, the risk of being unable to secure a mortgage at the end of your lease or the risk of falling prey to rent-to-own scams.
Individuals who are considering a rent-to-own agreement should be aware that there can be untrustworthy people in the rent-to-own industry, just as there are in any other industry. Some sellers try to take advantage of rent-to-own through illegitimate or problematic rent-to-own deals. Falling for one of these scams can cost you thousands—or more—and leave you in a financial mess. Educating yourself on the most common rent-to-own scams is the best way to reduce your risk of becoming a victim of one.
What could go wrong with a rent-to-own agreement?
House, maintenance and ownership problems
One of the more common problems with rent-to-own is when a buyer is tricked into buying something without being fully informed. For example, if an individual signs a rent-to-own contract for a home that has a faulty foundation or a mold infestation, the individual will be responsible for fixing the issue that they might have otherwise been able to avoid. Or, a landlord might not be paying the bills for the home, so the home could get foreclosed while the potential buyer is living in it. This means that the potential buyer could lose the option fee and the equity they were collecting, and they also would have paid higher-than-average monthly rent for no benefit.
Additionally, the landlord could promise to deal with problems around the house but then ignore all of them once the contract is signed, leaving the potential buyer with the cost.
Lastly, the person who is claiming to be the landlord might not own the property at all. In this scenario, you’ve likely handed over several thousands of dollars as an “option fee” and have paid premium rent to someone who isn’t entitled to offer a rent-to-own contract as they don’t own the property.
Confusing contracts
The rent-to-own contracts themselves can also get tricky. The average person could miss something in their rent-to-own contract that ends up being used against them. Scammers purposely include vague or confusing language in the contracts so that the buyer eventually backs out of the contract, leaving the seller with the option fee money and the premium rent.
Stolen identity
During the rent-to-own process, an individual could potentially provide too much of their personal information to people who want to steal their identity. Again, someone who doesn’t own the property could be pretending to be the owner. An individual could hand over personal information with the intention of entering a rent-to-own contract when really they are just falling for a scam.
Know the warning signs
There are some telltale warning signs of a rent-to-own scam. Look out for homes that are notably overpriced or underpriced. Don’t trust something that seems too good to be true. When a home is underpriced, it might means that the seller could attempt to deceive the potential buyer during the rent-to-own process. Maybe they don’t own the home, maybe the home has serious issues or maybe they’ve created a contract that favors their needs.
Overpriced homes can also be a scam. Sometimes, a seller can overprice a rent-to-own agreement because they know the buyer is desperate to own property but a mortgage isn’t feasible yet.
Look out for neglected homes or homes that are already being foreclosed on. Your rent-to-own contract is void if the home is foreclosed.
Make sure to check your agreement for mentions of fees and extra payments. Everything should be clearly stated in writing so that you’re not unpleasantly surprised moving forward.
Finally, your landlord shouldn’t try to stop you from having an independent inspection done. A landlord who’s scared of an external inspector usually has something to hide.
Take steps to protect yourself throughout the rent-to-own process
The good news is that there are steps you can take to protect yourself in the rent-to-own process. Try some of the following steps:
- Research the seller to see if they have any lawsuits against them, former unhappy tenants or any other red flags.
- Work with a professional attorney or real estate agent to review the contract. While you may not officially buy the house until your lease is up, the initial rent-to-own contract spells out the conditions of your sale. As a result, it’s best to get professional support from the beginning.
- Check the title to make sure your landlord actually owns the land.
- Avoid paying up-front fees—even application fees. You’ll want to do your own research and possibly consult with lawyers and Realtors before you make any payments.
- Browse specific websites like foreclosure.com to ensure the home isn’t at risk of foreclosure.
- Look at renttoownlabs.com or work with a rent-to-own program to ensure you’re working with a verified seller. Rent-to-own programs run by the government are your safest bet.
- Report anything you think is a scam to your local police department and notify your state’s consumer protection office. Although you may have gotten by without being deceived, you don’t want anyone else to be deceived either.
For more information on rent-to-own, examples of contracts, red flags to look out for and ways to shop for the best deal, download the Complete Rent-to-Own Guide for Prospective Homebuyers.
Or, choose to focus on improving your finances
Rent-to-own isn’t for everyone. It can be a good solution for some, but there may be an element of risk involved that not everyone is comfortable with. Ultimately, you should consider all your options and choose what works best for you.
Alternatively, you can avoid the rent-to-own route and choose to try to improve your financial situation instead. You can work on your credit and start saving for a down payment so that you can qualify for a mortgage. Reach out to Lexington Law Firm for help analyzing your credit report to identify any false or incorrect items that may be dragging your credit down.
Reviewed by Anna Grozdanov, Associate Attorney at Lexington Law Firm. Written by Lexington Law.
Anna Grozdanov was born in Sofia, Bulgaria, but moved to Arizona with her family. Ms. Grozdanov grew up in Arizona and went on to graduate Magna Cum Laude from the University of Arizona with a B.A. in both Philosophy and Psychology. Ms. Grozdanov finished her first year of law school at Pepperdine University School of Law in California, but returned to Arizona where she graduated from the Sandra Day O’Connor College of Law. Since graduating from law school, Ms. Grozdanov has worked in Estate Planning, Estate Administration, Probate, and Personal Injury. She has extensive experience advising and working closely with clients and applies these skills at Lexington by helping clients achieve their credit repair goals. Ms. Grozdanov is licensed to practice law in Arizona. She is located in the Phoenix office.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
Lexington Law is not an RTO company. Any content provided on this website regarding the topic of RTO is nothing more than a resource Lexington Law believes might be helpful to readers of its website. Lexington did not write this content. It was provided by a third party. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers. Lexington did not write this content. It was provided by a third party.