RentToOwn-HouseFinder.com

Rental houses advertised as "rent-to-own" - scam or not?

I'm looking for a rental for when I move this summer for a new job. I'm just graduating, so I don't have the work history to be considered for a mortgage yet, at least without a co-signer. Plus I don't think it's a good idea to just up and buy a house somewhere that you've never lived before, especially in this market (since you're stuck with what you get for a while). So I keep seeing these rental houses that are rent-to-own, where if you decide at the end of the lease to buy the house, they put the amount you've paid in rent towards your down payment. Generally, do these tend to be scams? I did notice that the rental rates are 20%-40% more than a mortgage payment would be, based on the fair market values of equivalent houses of the same size and location. That's what makes me wonder if, perhaps, the owners of these houses are trying to con people with bad credit or no savings into buying houses for WAY more than they're worth. I'll be an accountant in a few months so I'm not worried about getting scammed on a particular deal (i.e. I'll put the numbers and contract to the grindstone), but I'd like to know if I should even bother with the rent-to-own houses. If it's not a scam, it's a pretty sweet deal.

Public Comments

1. Usually, rent-to-own is not a scam. It's legit. It's not, however, the best financial move. Most of the time, the people who rent never wind up purchasing. Usually they get some of their money back at the end, but he landlord still winds up with more money than had the house just be rented out to begin with. Rent at market rate for a couple years, put some money away each month, and then purchase the old fashion way. You'll come out ahead in the long run.
2. From Atlanta Legal Aid Society (please send them a thank you note and a donation from the money that they have saved you from losing): "The lease with an option to purchase is the most common home purchase scam. Suppose you want to buy a house but cannot qualify for a mortgage loan. The seller makes you a deal: pay the down payment up front, rent the house for a specified time (usually a year) and in the meantime find financing to purchase the house. Usually the rent is overpriced but you're willing to pay because you think you'll own the house in a year. When the time comes to exercise your option to purchase the house and you still can't qualify for a mortgage loan, the seller evicts you, keeps the house, keeps your down payment and goes looking for another over-eager, under-cautious homebuyer. The contract for deed or land contract is essentially a rent-to-own agreement for a house. The seller provides financing and you think you own the house subject to the mortgage loan. But the contract says that the seller won't transfer the title until the last payment is made - 20 years later! If you miss even a single payment, the transaction becomes a lease agreement. The seller then evicts you for non-payment of rent and keeps the house, the down payment and all the equity you worked to accumulate." OK, me again: You do not want to buy a house without having it inspected by someone who is a good inspector to know what problems need fixing or if some problems are too big to be fixed... with the lease you are already in... what if it has termites or a cracked foundation ? Then there's the thing about negotiating a purchase price... now or a year from now? Housing prices are going D-O-W-N.
3. Most Rent-to-Own transactions never close as sales. You pay more rent because part of the rental amount is supposed to go towards your purchase of the property. ANY transaction like this should be done in consultation with a lawyer who should draw up the agreement. This is NOT something that you add on to a lease agreement. And the paperwork should state what will happen w/extra money that was to be credited to purchase if purchase does not happen. Usually in these types of transactions ]the purchase amount and sales terms are agreed to at the outset and the date when the buyer must "fish or cut bait" on the purchase. I would caution against paying a "deposit" on a Lease Purchase. Now a Lease w/Option to Purchase may well include an option fee, rather than an increase in rental amount. The sales price and terms may be deferred to a later date. Usually the renter/buyer would lose the option fee if s/he chooses not to buy the property. Whether the Option Fee is credited to the purchase would be determined by the agreement. Again, I would recommend having a lawyer draw up any agreement that may require you to buy or sell a property and would have financial/legal repercussions. Real estate agents/REALTORS are not able to write these agreements.