Rent To Own Scams and Alternatives
Nobody has time for rent to own scams. Rent to own option is not for everyone and certainly is not always the best option.
Each situation is different and rent to own agreements can get very complicated. If you do not understand the concept and legality of it, in each case we strongly suggest to seek legal advice or to talk to an experienced real estate professional that can help you through the process. If you are doing it on your own, here are a few tips and things to avoid.
Although Rent To Own might sound like a great option, it may not always be in your best interests. It is important to keep in mind that these rent to own scams happen only when you do not use caution and don;t have an experience real estate professional on your side. There is nothing wrong with either of the alternatives to rent to own below if used properly.
This is complicated stuff and is one of the rent to own scams to avoid if you are not experienced. Don’t make your life difficult. If you really can’t get financing or find a decent rent to own home – just rent a home for a year, figure out your credit and financial situation and see if you can buy a home in a year or two instead. Don’t get involved with stuff that you do not understand and need a lawyer to help you. You will see a lot of unlicensed “investors” that you find on Craigslist advertising these type of deals. Not all of them are evil of course, some are very good at what they do, but a lot of them are amateurs and are doing it because they watched a webinar or took a 1-day crash course on real estate investing.
What is a Wraparound Mortgage?
Wraparound Mortgage is a type of a loan that allows the borrower who is paying off an existing loan on the property to obtain another form of financing from a second lender. The new lender (investor, seller, or another bank) then assumes the payment of existing loan and gives a borrower a larger loan usually at a higher interest rate.
Let’s assume there is a seller that owns a house with a $60,000 loan at 5% on it. Seller is desperate and doesn’t want to deal with selling his house, paying off the mortgage and just wants $5,000 to move on with his life. There is an investor that finds this seller and has a buyer looking to do a rent to own. Investor knows that the house is worth $100,000 so he sells it to a buyer looking for a home. Buyer puts $20,000 down, owes investor $80,000 at 8%. Investor pays $5,000 to the seller to get him out of the house and assumes his loan at $60,000 and gives him a promissory note that he will keep paying mortgage in exchange for the deed. Investor keeps $15,000 and collects monthly payment from the new borrower and makes payments on existing loan.
What can go wrong?
Investor stops making payments on the existing loan, loan goes to foreclosure. Buyer keeps making payments to investor but receives a foreclosure notice. Investor walks away with monthly payment and $15,000, seller gets foreclosed on, buyer is out $20,000, monthly payments, and has to move out and find another house. Scary isn’t it? It works great if buyer is able to do this with a trusted “investor” or bank willing to do a wrap around but is definitely one of the common rent to own scams and a trap for those that don’t do their homework and attempt to do it on their own. Do your homework, don’t become another rent to own scams victim on Nightline.
Contract For Deed
Another way to finance a home is to use a contract for deed that also comes in all different shapes and sizes and can be one of the rent to own scams. With this option, seller acts as a bank and gives a “personal loan” to the buyer for specific period of time with a balloon payment due at the end. Seller will usually charge a higher interest rate than the bank and collect monthly payments until buyer either pays off the contract fully or obtains a mortgage to pay off the seller. Once buyer fulfills the terms of the contract, the deed is transferred from the seller.
Contract for deed and rent to own often times are used interchangeably and to some of us sound synonymous. Although, in a lot of cases, it sounds very similar but both are completely different arrangements. Contract for deed and rent to own agreements can be structured the same, but in a rent to own arrangement buyers name never goes on the title until actual sale happens.
What can go wrong?
A lot of things! Due on sale clause – every mortgage has a due on sale clause which technically prevents you from selling on a contract for deed. So if seller sells a house to you on a contract for deed and stops making payments, foreclosure process begins. Seller gets foreclosed on, buyer has to move out and loses down payment and becomes another victim on StarTribune.
Even if things go well and payments are made – lender can foreclose because of the due on sale clause (not likely and probably never happens but possible). Make sure the house is free and clear or someone is keeping track of mortgage payments.
This is a situation when a seller of the property finances portion of the balance that buyer owes. If buyer owes 100% to seller and has 10% down but bank is willing to loan only 80%, then seller has to carry 10% to make up the difference. Not very common nowadays but a lot more popular among investors.
Lease with Option To Buy
Very similar to rent to own but usually does not involve a down payment. Most of the time it is a rental with an option to purchase for a pre-determined price. It is becoming a more popular and common ways of securing property especially for those that don’t know if they want to rent or buy. Tons of programs out there, pick the one that’s right for you.
How to Avoid Rent To Own Scams?
- Hire a licensed and experienced real estate agent to lookout for you
- Talk to a loan officer, what if you are a few months from being qualified for a home loan?
- Use a third party investor who will pay off the seller and sell a house to you on contract for deed. There are investors and companies out there that buy homes and help buyer become home owners sooner, nothing wrong with that.
- Seek legal advice if you have no clue about what you are doing
- Avoid unlicensed “investor wanna be” off Craigslist or random website you found on Google
- If you can’t afford it, rent until you read to buy a home. Don’t force it
Think twice when entering in such agreements. These are very unique and not a whole lot of people (yes, not every real estate agents gets them either) are familiar with them. Make sure you work with an experienced professional when trying to come up with creative financing for your next home.