General Question

girlofscience's avatar

What are the pros and cons of rent-to-own situations?

Asked by girlofscience (7475 points ) January 8th, 2011

My boyfriend and I are looking to move into a house in Durham, NC (we currently live in an apartment in Durham), but we were planning on renting because we’ll only be in the area for a few more years. Specifically, we were trying to avoid all of the headaches that come along with home-ownership, as it doesn’t seem worth it for just three years.

However, we came across this property, which has a rent-to-own situation. I called the number and spoke to a guy who explained this particular situation to me. He said:
– First, we will need to pay a $199 membership fee, and we’ll be given a username and password through which we can view all of the properties. (If we do not end up choosing one of these homes within 90 days, we receive the money back.)
– We view homes of interest, select one, and move in. We then begin paying “the bank” a monthly rate, comparable to a rent rate. (There is no down payment.)
– We own the home and can sell it at any time.
– The guy searched for properties in my area, and there seem to be a lot.
– He said these are homes that have been foreclosed?

Problems we foresee at the moment:
1. Why this $199 membership fee? Is this scammy?
2. Something seems off about the marketing of this. There’s no credit check, which seems like a bad sign. And when the guy was mentioning possible homes in the area to me, he mentioned a house that was $180,000 which would have a monthly rate of $900/month. He then said, “But if that is too much for you, we also have less expensive options.” He knew that it was for me and my boyfriend, and it seems ridiculous that he would think $900/month would be “too much” for a dual-income couple…
3. Even if problems 1&2 checked out, the main concern is that this would be a major headache in three years when we plan to leave the area. We’ll still be responsible for this house, so we’ll need to either sell it or rent it out to someone. Would we be likely dealing with this house 20 years from now?

Does anyone have experience with this or knowledge of rent-to-own situations? Is this something worth pursuing? How does it all work with the home being foreclosed and now being in this situation rather than in a regular home-purchasing situation?

(Just a note for those of you in higher cost-of-living areas, if you think these prices seem “too good to be true,” the cost of living in Durham is actually VERY low, and very nice 3-bedroom single-family homes typically sell for around 150–200k and rent for ~$1100/month!)

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15 Answers

Tropical_Willie's avatar

SCAM + + + + Go to a real estate agent that specializes in rentals. Big story and upfront charges are a red flag.

girlofscience's avatar

@Tropical_Willie: Out of curiosity, do you happen to know exactly what the scam is here?

Tropical_Willie's avatar

The up front charge. No credit check may mean they are looking for people with bad credit and not sophisticated. Get a copy of the News & Observer and look for rentals.
If you want a “rent to own house” once again contact a real estate agent. Foreclosed may not mean he owns them.
How is the bank is involved, they should hold the deed?? ? Is it really a bank or him?

girlofscience's avatar

Yeah, it was hard to figure out how the whole situation worked with “the bank” when I was on the phone with him.

We are totally fine with finding many great rental possibilities, so we don’t need advice on how to find houses to rent! We were just asking about this one particular rent-to-own situation we stumbled upon.

SavoirFaire's avatar

I used to work for a furniture store that refused to do rent-to-own because the manager thought the very notion was a scam. I know that houses aren’t exactly the same, but I suspect the principles behind each are at least similar.

That said, I suggest looking at how long you’d have rent in order to own the house. It’s usually a very long time, over which you’ll pay much more than the house is worth. Furthermore, you may wind up with absolutely no equity in the house if you leave before taking ownership of it. So this may really be a leasing option with the unlikely possibility of ownership ambiguously held out as an incentive. Check the contract carefully, even if you’ve been told that you’ll “own” the house while you are there.

Even if my worries are all misguided, however, trust your instincts. If something about the deal seems off, be very careful. Real estate can go very badly for buyers. Besides, it doesn’t seem like this house actually meets your needs. If you already have plans to leave the area, settling into a situation like this doesn’t seem optimal.

klutzaroo's avatar

There were people in my area who paid someone from Craig’s list rent on a house that those people never owned. They tried to move in to find the actual residents, whose home had been up on the web when it was on the market (where the pics came from), already there. Moral of the story, NEVER use Craig’s list to find somewhere to live.

mrlaconic's avatar

I have actually lived in a rent to own situation that was setup through the renter (who also happened to be a real estate agent). There were NO upfront “fees” other then the cost to move into the place which for me were first, last, and deposit.

The terms of my contract were clear – I paid 1195.00 a month in rent and 200.00 of that went to a private bank account to be put towards the purchase price. If I had decided to buy before the end of my lease.

The Pros: You get to live where you want and have an option of buying it if you really like it / want to stay in that area.. and depending on what is being set aside for you it could be a good amount towards the down payment.

The Con’s were that I ended up not buying that place so the owner got to keep that 200.00 a month that was being set aside for me and 1195.00 a month went to pay someone elses mortgage.

I don’t think I would least to own again.

girlofscience's avatar

@SavoirFaire: We would prefer that ownership wasn’t actually a possibility. In reading about most rent-to-own situations, it seems like most are typical rent situations for a few years with the option to buy later down the road, and a portion of the rent paid over the past few years put toward the purchase. When I asked this guy if we could just rent the property and choose not to buy it, he said no, that the only option was ownership.

mrlaconic's avatar

@SavoirFaire I agree the rent to own stores are bad… but the process is different for a rent to own a house. There is no set time other then the lease… in which a little bit of money is being set aside for you and then you can BUY it… at whatever is being sold for it.. but you were just paying rent on it before with a little money being put a side.

SavoirFaire's avatar

@girlofscience That seems strange, but I don’t know enough about the situation to really say. In any case, it doesn’t seem like this house meets your needs. Look elsewhere, and try to find someone who can spell everything correctly in an advertisement!

@mrlaconic Ah, I see. I was overgeneralizing. Thanks!

choreplay's avatar

Stopped reading at the $199 fee. RUN. DONT DO BUSINESS WITH THIS PERSON.

reinvestor's avatar

I am a real estate broker in Illinois specializing in real estate investing. A typical rent-to-own situation is simply a lease with a certain amount that goes into a “down payment” fund. For example, a $1000/mo lease with a rent-to-own clause may specify that $200 goes toward the purchase price. After a year, the “down payment” fund would reach $2400. If the renter decides to purchase, they can use the $2400 toward purchasing the house. If they do not, the landlord keeps the $2400 as rent. A rent-to-own clause is simply part of a contract, and the terms and conditions can vary significantly from one to the next.

This does not seem to be a rent-to-own situation. The fact that he mentioned paying “the bank” a monthly rate, comparable to a rent rate. (There is no down payment.)” seems to suggest a land contract (also called a contract for a deed). This means that the seller holds legal title to the property, and gives the buyer what’s called equitable title. Equitable title means that the beneficiary (you, in this case) have court recognized legal rights to use and enjoy the property, but are not the legal title holder. Usually, a monthly payment is made and a balloon payment is required at some point to pay off the balance. This is also consist with why he would say the only option is ownership. This results in an equitable conversion, which is when you convert your equitable title to legal title, and the have all the rights of ownership. For more info on land contracts google “land contract wiki”.

Land contracts are beneficial in some situations, such as when someone is repairing their credit or will receive a large settlement or inheritance in the near future. The buyer can get short term financing until they are able to secure their own mortgage. In this case, the seller may have a mortgage that you would pay his bank directly, since he mentioned paying the bank a monthly rate. He also said the monthly rate was comparable to a rent rate. If this was rent-to-own, we would simply call this rent, not “comparable to a rent rate”. There are a number of potential gotchas if someone is trying to use a land contract to scam, for example, the land contract may include a balloon payment in a year or two. If you don’t read carefully, you may be on the hook for $150K. Also, the legal title holder should record your “equitable title” status in public record, but if he doesn’t it’s difficult and complicated to enforce your rights as an equitable title holder. So, if you don’t pay your “rent” he may be able to get you evicted without going through the normal eviction process since you are not a renter.

Also, as others mentioned the $199 fee should be a red flag on this. If he was really looking for a long term mutually beneficial relationship, there’s no need for this. My best guess is that this is a land contract with some really sketchy details and my advise is to stay away.

YARNLADY's avatar

A rent-to-won can be a good plan, if it is legitimate. The plan should be spelled out carefully. Always have a real estate lawyer look over the contract before you sign it. There will be a lawyer fee to pay, but that is better than getting scammed.

Skaggfacemutt's avatar

Most rent-to-own situations are for people with bad credit who can’t qualify for a normal loan and don’t have the money to buy outright. They charge you the normal price to rent the item, plus extra to put away towards the purchase. They are getting their money, plus extra for taking a chance on you. You are paying much more than you would with a normal loan, the consequence of not having good credit. Since the transaction is largely “off the radar” it really opens up a lot of ways to get scammed.

Gabby101's avatar

I lived in a place that gave a credit for your rent that you could use to buy one of their houses. There was no upfront fee and the amount of your rent that became a credit was incredibly small compared to the cost of the house. It was in no way a scam, but I suppose someone who didn’t actually do the research would think it was a “scam.”

You have to do the research and read the contract. If you can’t understand it, give it to a lawyer or other professional who can look it over for anything unfavorable. My guess is they probably make a lot of money from people who don’t cancel after the 90-day period and they collect $199 for doing nothing. I would also guess that they take the money and then there is a clause in the contract that says before you can move into the house you have to pass a credit check.

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