RENT-TO-OWN: A Misnomer of an Old Practice

With the current conservative lending attitude, buyers and sellers are looking for other alternatives to buy and sell property. This concept of Rent-to-Own seems to be taking root. Rent-to-Own infers that by renting a property you can subsequently become the owner which was similar to an old practice called an Installment Sales Contract that has since been prohibited by Connecticut Law.

In an Installment Sales contract a Buyer and Seller agreed upon a price and the buyer would move into the property and pay the Seller monthly payments towards the purchase price. When all the payments were made (which seldom happened) the Seller would Deed the property over to the Buyer. Many Sellers, upon any default, declared the Buyer in breach, terminated the contract and kept all the money already paid as rent. Most times the Buyer had no other funds to challenge this in court and ended up losing everything; hence the current prohibition. Now a new Rent-to-Own concept has arisen. It really is not as it implies because renting does not actually give you the right to own the property. There are many variables and any one that does not line up can derail the process.

First, you have to have a seller that wants to sell his/her property and is willing to continue to hold the property off the market for a specified period of time, usually 3-5 years. Second, you would enter into a rental agreement to rent the property and as part of that agreement there would be an option to buy the property for an agreed upon amount. The security deposit is usually credited towards the down payment if it has not been diminished otherwise under the contract. In addition, the seller will usually agree to credit a portion of the rent paid towards the deposit if the option to purchase is exercised by the tenant. Conceptually this may sound like an option, but there are many pitfalls that can occur in a 3-5 year period. For example, a default in the rent can terminate the option. Now the landlord can either keep you as a tenant or evict you and then market the property. There would be no portion of the previously paid rent refunded because the amount that was to be credited towards the deposit was contingent upon you buying the property. If default is made in the rent and/or an eviction is commenced, your security deposit will probably be utilized and exceeded by the seller.

Even if you do make it through the full term of your agreement and now want to exercise your option to purchase:

  • Is your job still secure?
  • Has the housing market increased from when you entered into this arrangement, which can affect the amount of down payment a lender may require, which is more than what you saved?
  • Has the neighborhood declined such that you no longer wish to live there?
  • Has the condition of the house declined such that it isn’t worth what you agreed to pay for it or will require many more repairs than you planned for?
  • As the seller, has the tenant/Buyer now caused damage to the property and decided not to buy leaving you with a house worth less than when you entered the arrangement?
  • What if the Landlord/Seller defaults on his/her mortgage and the lender forecloses the property? All of the tenant’s rights may be gone and if the seller is bankrupt the buyer may not even be able to get his/her security deposit back.

My philosophy has always been to get in and out of a contract as quickly as possible to minimize the potential problems that can occur during the contract period. A long term contract, and that is exactly what Rent-to-Own is, is a lot of time during which many things can go wrong for both the Buyer and the Seller. A short term rent-to-own may be a viable option in certain circumstances.  If you are considering such a situation, be sure to consult with an experienced real estate attorney before signing any paperwork.

When results matter, experience counts.

Post a Comment

Your email is never published nor shared. Required fields are marked *

*
*

X

Contact Form

We will respond to your inquiry in a timely fashion. Thank you.

  • This field is for validation purposes and should be left unchanged.