Triangle Area Real Estate News & Information

Rent-to-own is never a good deal. It’s a lose-lose proposition for a buyer. In the 35 years that I’ve been in real estate, I’ve never met a single person who purchased a property in this fashion and had a positive outcome. While, in theory, it might sound like a reasonable idea for someone who is not yet in the position to buy a home and needs a year or two to build a good credit rating, in reality it simply does not work this way. These deals are usually predatory and designed to take advantage of tenants who have limited options due to their financial situation—and who will agree to unfavorable terms because they don’t know any better. In our experience, there are only two reasons why sellers pursue rent-to-own deals.

The Location is Unattractive

The best-case scenario: a property owner needs to get rid of a house in a bad location and can’t get anyone else to buy it. A tenant with a bad credit rating and no ability to get a mortgage from the bank may find this appealing since it seems to offer the opportunity to own a home. But you have to think critically about this. If the landlord’s ultimate goal is to sell the property, why would they not just sell it outright? The answer is simple: they can’t. Maybe the house is located in a high-crime area or has train tracks running right next to it. In any case, creditworthy buyers have better options. Rent-to-own deals offer landlords in this situation a way to off load a property they otherwise couldn’t sell.

The House is in Bad Condition

If you sign a rent-to-own agreement, the odds are good that you’re buying expensive problems—possibly some that are impractical or impossible to repair. For example, you might inherit foundation problems due to the surrounding geography (see my earlier article about soils and foundations) or structural issues related to how the home was built. Maybe the water pressure to the house is low—a condition you often can’t do anything about. Maybe the owner knows that the roof only has a few years left before it will need to be replaced entirely. Maybe the HVAC unit is on its last legs. When you become the owner, all of these issues become your problems and the former owner has no further obligation to pay for any repairs (see also: Seller Property Disclosure: What Does it Really Mean to Buyers?).

The Seller Intends to Foreclose

The ugliest scenario with rent-to-own properties is unfortunately common. Unscrupulous investors buy up cheap properties and target would-be homeowners with low credit scores, hoping that the buyer will default on the terms of the contract. Investors know that these buyers are easy targets, because they are most likely to get in over their heads. The contracts are designed to be difficult to honor, so that when the buyers begin to fall behind on payments, the investor can foreclose on the property and do it all over again with another buyer. Even in the rare cases where buyers do manage to honor the agreements, the investor still gets to charge exorbitant fees and interest rates. There is no downside for the investor—and no upside for the buyer.

If you’re considering a rent-to-own deal, don’t do it. You may just need to rent an apartment for six months to a year while you build up your credit rating or save money for a down payment. The old adage definitely applies here: if it sounds too good to be true, it probably is.