According to Bob Aaron, a real estate lawyer with Aaron & Aaron, rent-to-owns typically surge in popularity during market downturns, and they’re also one of the few options people with bad credit have available to them. However, Aaron also says that it’s his preference to advise clients against entering such arrangements.
One way in which buyers get short-shrifted is by paying above-market rental prices than they would for a similar house, which, if the buyer chooses not to purchase the home, cannot be recovered.
“Rent-to-own helps when the seller can’t sell and when buyers can’t get approved for mortgages, but the way it often works is the seller gets the lump sum from the buyer/tenant which is used to underwrite the down payment,” said Aaron. “So if the buyer decides not to close, or can’t close, or can’t get a mortgage, all that money they paid up front and along the way is down the drain.”
He also says another problem with rent-to-owns is there aren’t any industry standard forms.
The buyer/tenant isn’t the only party at risk, though.
“A defaulting owner can stick the landlord-/investor with all kinds of arrears, mortgage taxes, utilities, and damages to the house, and the landlord/owner/seller is going to be stuck with those arrears and damages,” said Aaron, adding the courts don’t recognize rent-to-owns under the tenancy act.
“If the buyer- occupant is in default, it’s very difficult to get rid of them.”
There have been stories of unscrupulous rent-to-own companies in the media, but one in particular has taken a unique approach to the rent-to-own model, and has a 100% success rate of turning its renters into homeowners.
Dale Monette, CEO of Homeowners Now, explained to CREW that by empowering renters with everything they need to improve their credit scores, save money, and eventually own their homes, the rent-to-own model can become an exceptionally successful way to help families achieve homeownership.
Homeowners Now endeavors to get their clients both financially- and emotionally- invested in their future homes by holding tenants’ down payments in trust. The company takes a client-first approach, which entails allowing the client to choose the home they want to live in and purchasing it for them.
“Some rent-to-own companies do a $0 down payment, but we want to get them financially invested by placing an initial down payment, typically 3% of the purchase price, and holding it in trust for them,” said Monette. “Based on our research, $0 down programs have a higher likelihood of the client walking away from the property, because they weren’t financially invested.”
Homeowners Now made the internal decision to return down payments should their clients default, but with a 100% success rate that’s never happened. One reason is the company does everything in its power to make sure its tenants have everything they need at their disposal.
“We actually pay for home inspection reports and appraisal reports, as well as the closing costs for our clients,” he said. “They don’t have to give us any more money for closing costs or legal fees – they just provide the down payment and monthly rent. We take care of the rest. When working with us, essentially our clients are working with a team of self-employed entrepreneurs, like realtors and mortgage brokers, so they stay directly in touch. We even help our clients with grants when they experience hardship, which ultimately helps them become successful in the rent-to-own transaction.”
As Aaron says, it’s important to have all documents perused by a lawyer. Equally as important is selecting a company that invests in its clients as much as it does in properties.
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While rent-to-own purchases are becoming more popular, it’s important to know who you’re dealing with, and to balance the risks and rewards.