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Tenant or owner? Why you should be cautious about rent-to-own arrangements

For those who have good credit, steady income, and access to a reasonably affordable housing, home-ownership is relatively easily within reach. Unfortunately, not everybody has these resources, and this makes home-ownership a more difficult prospect.

For those who are unable to become a homeowner the ordinary way, traditional leasing is not the only option on the market. An alternative possibility for would-be homeowners is so-called rent-to-own contracts. These contracts are similar to lease arrangements, but enable renters to build up implied equity with monthly rent payments. While these contracts do make home-ownership more accessible to those with poor credit and those who either don't have a sufficient income to qualify for a mortgage or who are otherwise unable to qualify for a mortgage, significant caution should be exercised when considering these deals. 

The reality is that rent-to-own agreements are risky--few result in actual purchases for the tenant. There are various reasons for this. Typically, these agreements involve signing a lease agreement and providing a down payment to reserve the right to buy home. This involves long-term, high-interest installments which ultimately still require the tenant to obtain financing. The buyer doesn't receive title until final payment, and anything could happen up until title is finally acquired.

Also important to realize is that rent-to-own agreements often lack protections for consumers, such as no warranty of habitability, no requirement for independent home inspection, and no guarantee of full disclosure. Tenants are often left to deal with unresolved building code violations and damages themselves. In some cases, renters may be required to bring the property up to code and make it habitable within a certain period of time. Failure to abide by this requirement could mean losing the right to purchase the home without receiving credit for repair or renovation investments. For all these reasons, consumers should be very cautious about entering into rent-to-own deals.

In our next post, we'll continue looking at this issue, specifically regarding the difference between contracts for deed and rent-to-own agreements, as well as the importance of working with an experienced attorney in such real estate transactions. 

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