Some Rent-to-Own Agreements Questioned

August 22, 2016

In an effort to turn more of their renters into home owners, landlords are increasingly turning to rent-to-own contracts.

But a recent investigation by The New York Times calls into question some rent-to-own agreements, arguing that some of these deals are risky, lack consumer protections, and may not even be enforceable in some states.

Smaller firms, in particular, are offering renters the opportunity to lease less expensive homes with an option to buy. But housing lawyers are reporting an increase in disputes involving rent-to-own transactions and are cautioning renters to read contracts carefully before they sign.

For example, in one recent case, the city of Columbus has filed a lawsuit against Vision Property Management. The company, which owns more than 5,500 homes nationwide, does not offer regular leases or mortgages but instead “rent to own” agreements that requires the tenants to make all repairs, no matter how big.

Some renters, however, later discovered building code violations and major problems with the homes they moved into. One renter told The New York Times he faced an $8,000 cost to install a new sewerage system. The renter says Vision helped him find a contractor to make the repairs but then rolled the cost into a new contract, which then valued the property at $60,000. That also increased his monthly costs by $65 to $470 a month.

Vision maintains that it offers a “full and unconditional refund” to tenants within the first 30 days of a contract.

“Our goal is to put people into houses and turn renters into homeowners,” Landlord Alex Szkaradek told The New York Times. He says such rent-to-own agreements are helping those with poor credit to qualify for mortgages and obtain home ownership one day.

The recent New York Times investigation seems to dispute their lofty goal.

“Most tenants walk away with nothing, having sunk money for rent and repairs into homes they had once hoped to own,” The New York Times reports. “Others faced surprise evictions, having signed a contract that did not disclose what repairs were needed, yet set a deadline for making sure the home was up to local housing code. As different tenants move in and out of the same property over the course of years, many homes fall further into disrepair.”

“We’re seeing an influx in these contracts,” Katarina Karac, a city lawyer for Columbus, who is involved in one case the city has against Vision, told The New York Times. “It looks like a landlord-tenant relationship, except instead of having the landlord take care of the property, they are putting that obligation on the tenant.”

Some renters now say they were confused by the contracts’ terms and requirements when they signed them. They later find they are stuck with big, unexpected bills for repairs.

“They signed their leases and put down an initial payment to reserve the right to buy the house,” The New York Times reports. But “unlike most typical home purchases, rent-to-own contracts have no requirement to obtain an independent home inspection. The customers contend they were not informed of outstanding issues with Vision homes, many of which the company had bought for $10,000 or less.”

What’s more, if tenants leave before the end of the seven-year contract, they leave with nothing. They do not receive any credit for the money spent on repairs or renovations while they lived there. Buyers do not receive a legal title to the home until the last payment is made to the landlord. They still often need financing then to complete the deal.

Most states require landlords to keep homes and apartments they lease in habitable condition. Housing experts argue that such landlord obligations cannot be waived.

“If it’s a lease and they are claiming that none of the landlord-tenant obligations apply, then I would argue they have to adhere to federal truth in lending rules,” says Judith Fox, a professor of law at the University of Notre Dame. “You can’t have it both ways.”

Source: “Rent-to-Own Homes: A Win-Win for Landlords, a Risk for Struggling Tenants,” The New York Times (Aug. 21, 2016)