Rent-to-own risks, rewards

November 12, 2007, Inman Blog

Salerent Some home sellers are turning back the pages of an old playbook in offering to turn renters into buyers. The market slump has resurfaced contracts that can bring rental income to sellers and give renters the ability to work toward the purchase of the home they are renting.

These rent-to-own contracts, which are also known as lease with an option to buy or lease-option deals, typically allow prospective buyers to rent a property for a designated period of time while providing an option to purchase that property at a specific price, according to real estate columnist Ilyce R. Glink. Prospective buyers are typically asked to pay an option fee, and the deals can be structured so that this fee and a portion of the rent count toward the down payment in the purchase.

Lease-option deals were also used when the market was booming, as speculators acquired options to buy homes and hoped to sell off those options as home prices appreciated, the Post and Courier newspaper in Charleston, S.C., reports.

But while these deals appear to be a win-win for sellers and prospective buyers, there are some big risks. The newspaper notes that “lease options are becoming more popular” in this down market, “though the deals pose risks for buyers and sellers alike.”

Glink also noted the risks in a column this month: “There are plenty of ways that a rent-to-own or lease-option situation can go bad. There are scam artists who pose as owners of a property and don’t actually own it, which can cause tenants to be tossed out if the true owner emerges. There are also owners who take advantage of their tenants.” She suggested hiring a real estate lawyer to assist with rent-to-own contracts.

She was responding to a letter suggesting that lease-option contracts often fail and a number of states are investigating abuses of these contracts.

Real estate columnist Kenneth R. Harney noted last year that the state attorney general in Florida was investigating at least one lease-option promoter “for allegedly defrauding dozens of clients by pocketing their option fees and failing to transfer the houses when tenants were ready to buy,” and the state Legislature in Texas passed a law enacted this year that is designed to provide more protections to consumers who enter into lease-option contracts.

Inman News reporter Matt Carter also sheds light on “accidental landlords” — property owners who seek rental income from homes they can’t sell — in a special report.

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