Rent to Own Homes: Why you should never buy them
November 10, 2020
Rent to own homes are a popular idea for first-time home buyers, consumers with bad or no credit, and people who lack the income or job stability to put together a down payment. As a real estate agent based in Albuquerque, I’m no stranger to clients with rough financial histories. Many, many people have reached out to me to ask: how legitimate are rent-to-own homes?
I get it! They sound tempting.
You’ve been paying rent for years now, so why not use your rent to further your goals of home ownership, right?
Well, let’s talk about it. We’ll also go over some alternatives to rent-to-own situations that may work much better for you and your family.
There are many companies in my local area, as well as many nationwide brands that focus on rent-to-own properties. A lot of them have gotten increasingly popular in the past decade or so, and I know a lot of you have looked at them as an option.
Here at Dumb Blond, we’ve gotten calls from friends and family, people browsing Zillow, and people who’ve seen our videos on Facebook. Generally, they’re interested in pursuing homeownership eventually but have no idea how to get there.
We’ve all seen the ads on TV, the billboards, the signs.
It sounds attractive. I don’t have the savings to buy a home today, but I could just pay rent for a couple years and then own the home, right?
What’s the deal? Is rent to own legit?
Short answer: No. Absolutely not.
Long answer: Maybe sometimes.
The main problem with rent-to-own
Rent-to-own contracts are rarely written in favor of the customer.
These companies aren’t offering rent-to-own as a solution to your problems because they’re kind-hearted and compassionate. They see an opportunity to make money from you.
Now, that’s fine. Businesses need to do business, right? We also make money from helping our clients.
The problem is that in a rent-to-own situation, the consumer isn’t really the one who’s getting helped; the actual owner of the property is.
Let’s look at a typical rent-to-own agreement.
How rent to own works
In a nutshell, rent-to-own works like this:
- Somebody owns a property. Sometimes this is an individual, other times it’s a company that owns many properties. Larger companies usually buy homes that clients are interested in – these are the “pick your
poisonproperty” types of advertisements.
- A consumer signs a lease agreement on the property. Generally, rent will be along the lines of market rent plus an additional amount per month (a few hundred dollars, depending). Additionally, these properties may require a high upfront deposit.
- The consumer is granted a leasehold title to the property. Don’t interpret this as ownership – this is the identical right to a property you would get from renting an apartment.
- Over a period of time, the owner retains the additional monthly rents paid in a separate account. This money accumulates to become an eventual down payment for the home.
- At the end of the lease, assuming everything has gone according to plan, the lessee is granted full ownership in the property so long as they can secure the necessary financing.
Rent-to-Own Homes: The reality
This never works out quite as it’s sold.
In fact, rent-to-own tends to be incredibly predatory based on two factors: the type of consumer targeted by rent-to-own companies and what happens when the lessee fails to meet his or her obligations.
As someone who has gone through bankruptcy in the past, I remember personally being targeted with all sorts of advertisements from rent-to-own companies immediately after filing.
They all promised access to the dream of homeownership, so they were super appealing.
I reached out to a few!
Looking over their contracts, they all shared a few common threads:
First, I would need to qualify for financing at the end of the lease. If I did not, the company reserved the right to terminate the agreement.
Second, if I missed a rent payment or found myself only able to make a partial rent payment, the company reserved the right to terminate.
Rent was, of course, substantially higher than market rates on each of their properties to slowly create a down payment. If I missed a payment, could not qualify for financing, or decided I was no longer interested in the property, they had the right to keep the full amount.
In other words, if you’re unable to make your payments, you lose everything.
Additionally, I would be responsible for maintaining the home throughout the lease. The only real advantage of renting is that you don’t have to do your own maintenance. Even further? I couldn’t get a home inspection before signing the lease. For all I knew, the roof could have collapsed at any time and I’d have been on the hook for a $20,000 replacement.
They also have a tendency to target people that they know will be unable to make their payments. People with poor credit, low incomes, bad rental history, and little savings are all prime targets for rent-to-own companies. They weaponize the American dream by creating a trap for the already economically-disadvantaged.
Be smarter than that.
When is rent to own a good idea?
When you have a good attorney to read over the contracts and make sure you’re not being preyed upon.
Other than that? Never.
I can’t imagine a good, constructive rent-to-own situation.
So let’s talk about actual options.
What to do instead of rent-to-own
There are far more options for homeownership than most people realize.
The US Department of Housing and Urban Development, for example, exists solely to put more people into homes. That’s its entire mission and its reason for being.
Additionally, if you’re in New Mexico, our Mortgage Finance Authority has several options for low-income and poor credit consumers that allow thousands of people just like you to buy their first (or next) homes.
If you’re not in New Mexico? Your state most likely has similar programs! Cities frequently run their own housing programs as well.
If you’re serious about buying a home someday but aren’t sure where to start, we certainly invite you to reach out to us to chat about your goals, your options, and your steps for getting to where you want to be. Even if you don’t think you’ll be ready to buy for a few years, we would love the opportunity to begin helping you plan for the process now.