How Rent-to-Own Deals Can Lead to a Scam

Important steps you should take to check out rent-to-own programs: Internet Scambusters #750

Rent-to-own deals, in which would-be homebuyers get a chance to purchase the home they're renting, sound great on the surface.

But because the people who opt to use them are relatively inexperienced in the real-estate market, they're a sitting target for scammers.

In this week's issue, we'll tell you how to spot phony deals and how to protect yourself from the crooks.

Let's get started...

How Rent-to-Own Deals Can Lead to a Scam

It's such a struggle for many people, especially younger couples and those with a poor credit record, to get on the housing ownership ladder that often they turn to using a rent-to-own deal to move themselves onto the first rung.

On the face of it, rent-to-own works pretty much like the name says. You start off renting a home, but the owner agrees to sell it to you for a specific price in the future. In the meanwhile, your rental payments partly contribute to your eventual down payment. You may also have to pay an option-to-buy fee.

Sounds reasonable, right? But all too often, some of these arrangements turn out to be not quite what they seem, with would-be owners feeling they've been scammed.

According to the U.S. Federal Trade Commission (FTC), renters sometimes discover the supposed seller doesn't actually own the property. Or perhaps they didn't pay their property taxes and there's a lien on the home.

Other tricks include offering rent-to-own homes that are in such poor condition that they could never be sold in the traditional way, perhaps even with issues relating to lead piping or asbestos used in construction.

There have also been examples where the owner has promised to carry out repairs before a rent-to-own contract is signed but then fails to carry them out.

Worse, renters have been known to discover the house they were hoping to own is in foreclosure and can't be sold to them under the agreed terms.

"Even with legitimate rent-to-own deals, the devil is in the details," the FTC says. "You might have to pay upfront fees and higher monthly payments than if you were renting. In some deals, if you miss a payment, the deal is off.

"If you do make it to the end, you might find you're locked into paying more than the home is now worth, or that you can't qualify for a mortgage to finish paying off the house."

One search site dedicated to rent-to-own hunting (www.RentToOwnLabs.com) says the program often attracts inexperienced, first-time would-be buyers.

"Because of this, there are many rent-to-own scam artists out there hoping to lure naive renters into their trap," the organization says. "It can be difficult to identify them (the crooks), since the industry isn't subject to much inspection."

But there are some useful warning signs to look out for if you're thinking of renting to own.

• First is the old, familiar scam trick: the deal seems just too good to be true. Perhaps the rent or sales price will be super-low.
• Alternatively, perhaps the prices seem incredibly high. Scammers do this "to take advantage of those who desperately want a house but cannot secure a mortgage," say Rent to Own Labs.
• Another red flag is confusing or vague wording in the rent-to-own contract. This can lead to supposed sellers cancelling the contract for some minor infringement that you didn't spot in the contract.
• Also, beware of sellers who try to charge upfront fees -- for example, demanding an application fee. "It's more common than you might think for scammers to post listings for nonexistent houses in order to collect money from inexperienced buyers," the experts say.

In addition to these warning signs, here are 7 more steps you can take to protect yourself against a rent-to-own scam:

1. Do your best to check out the credentials of the owner/seller. Has anyone else claimed to be scammed by them? Can they provide bank references that confirm their business credentials?
2. Check the current market value of the home. A realtor might help you do this but there are also several Internet sites providing home valuation. And local governments will often tell you how much the house sold for and what the current valuation and property tax are.
3. Likewise, check with a local home rental agency (not the one you're planning to rent from!) on current rents in the area you're considering.
4. Use an attorney to check the wording of the contract. Let the owner know you plan to do this -- then they're less likely to include hidden escape clauses.
5. Talk to a reputable financial advisor about your eventual ability to buy. Scammers have been known to target people they know will never be able to afford to buy, force them to pay higher rents and then steal the rent-to-buy option fee.
6. Check with your local county tax assessor to make sure the property is not in foreclosure.
7. Don't pay an application fee without seeking relevant legal and financial advice.

Finally, as the FTC suggests, perhaps reconsider whether rent-to-own really is the best way to proceed. How about drawing up and following a sensible savings plan or taking whatever steps are necessary to repair your credit?

Rent-to-own programs may sound like a good idea, but the last thing a young couple or credit-damaged person wants is to find their struggle just got even tougher through a scam.

Alert of the Week

Staying with this week's theme, it's timely to warn about two other home rental scams to be on the lookout for.

• Watch out for bogus rentals, usually advertised at attractive prices on sites like Craigslist. Check out our earlier issue on this topic: Empty Homes Open the Door to a Rental Scam.
• As we head towards vacation season, watch out for fake vacation rentals, sometimes even offered unknowingly through reputable agencies.

Don't rent without checking out the property and owners' credentials thoroughly. And never pay by money-wire services.

Time to conclude for today -- have a great week!