Rent-To-Own, Lease-Purchase Offers Gaining In Popularity (Uh Oh, Here We Go Again!)

The Detroit Free Press reports:

• "Michigan's sour housing market is pushing more sellers to slap rent-to-own signs in their front yards to lure buyers. At the same time, more purchasers are opting to get into homes using this nontraditional method, some real estate agents say. [...] Agents say the surge in rent-to-own deals in the region can be attributed to the increase in foreclosures, bad credit resulting from job cuts, homes sitting on the market too long and people not having enough money for a down payment."

The article gives a brief explanation of what the elements of a rent-to-own contract are. For more, see Rent-to-own gains appeal in slow market (Nontraditional option can benefit both sellers and buyers).

Editorial Note

What the article doesn't emphasize is that, as "rent-to-own offers" gain in popularity, so will "rent-to-own scams." One common scam is using a "rent-to-own offer" as bait to lure an unwitting tenant/prospective purchaser into an equity skimming / rent skimming scam. In such a scam, the property owner (either a "professional" equity skimmer, a participant in a straw buyer, mortgage fraud scam, or an honest real estate investor or homeowner who simply got in over his/her head) is either in, or about to go into, foreclosure and is trying to squeeze every last dollar out of the house as possible before unloading the home on the mortgage lender, leaving both the lender and the "rent-to-own" victim holding the bag.

Homeowners can unwittingly find themselves with problems as well if they are not careful both (1) with the paperwork that is signed when doing one of these deals, and (2) in who they select as their prospective tenant/homebuyer. For example, if a rent-to-own offer is structured as purchase contract with a "deferred or delayed" title closing (say 1 to 3 years, for example), whereby the rent-to-own purchaser gets immediate possession of the home and agrees to make monthly payments to the selling homeowner until the deal ultimately closes and the "legal title" is actually transferred, the law in some states (I suspect many states) treats the arrangement as a transfer of "equitable title", and the unwitting selling homeowner is treated, not as a landlord, but as a lender holding a "seller financed" mortgage with a "balloon payment" due on the date set for closing in the contract. In such a situation, if the rent-to-own purchaser decides to stiff the selling homeowner on the agreed upon monthly payments, the selling homeowner will not be legally able to evict the rent-to-own purchaser. The selling homeowner's only recourse would be to initiate a foreclosure action (the same way any mortgage lender would) to regain possession and legally wipe out the rent-to-own purchaser's "equitable title."

In the meantime, the rent-to-own purchaser has use of the home until foreclosed upon, during which time he can use the home to live in, or find an unwitting tenant and pocket the rent money. For the selling homeowner's sake, just hope the rent-to-own purchaser doesn't use the home as a marijauna grow house. In that case, the rent-to-own purchaser may actually pay the monthly payments for part of the time, and when the home can no longer be effectively used as an indoor pot farm because of the mold contamination in the home common to these illicit operations, the rent-to-own purchaser can simply stop making the payments and let the selling homeowner take the house back, mold and all (with the possibility of having to explain his/her negligence to the mortgage holder as to why the loan collateral was allowed to be destroyed).

In my view, entering into a rent-to-own arrangement is much more complicated than getting a mortgage. It should go without saying that to thoroughly perform all the necessary due diligence that such a deal requires (ie. review recent sales history for the property for evidence of flipping, title search to determine who actually has title to the property and that it is not currently in foreclosure - look for recorded lis pendens, notice of default, etc., prepare the terms of the deal which are unique to lease-purchase, rent-to-own transactions) will probably require the assistance of an experienced, competent real estate attorney (not one whose law practice consists primarily of "doing simple house closings" or "selling title insurance" in the capacity of a title insurance agent - common for attorneys in some regions). The paradox here is that the consumers who are the most likely to be offered rent-to-own opportunities are probably the least likely to be able to afford the services of such an attorney.

I think it is reasonable to predict that, at least to the extent that the people to whom rent-to-own offers are targeted have the same level of business, legal, and financial sophistication as the people who recently got hammered in the subprime mortgage debacle, we will be starting a new chapter (actually, we'll be re-starting a very old chapter) in the "Book of Real Estate Scams" (You don't need to be clairvoyant to see this coming, folks - just a novice real estate "historian").

For more on equity skimming / rent skimming, For posts on other stories of tenants unwittingly renting homes in foreclosure, go here and go here, and go here; and also, see Equity Skimming Foreclosure Rescue Scams. alpha