All cons start out with a little desperation from the mark. The mark needs something, in this case a place to live. But he’s not content with merely renting. He’d like to buy a home, but his credit is ruined. Even the bars where he’s a regular make him pay in advance. There’s no way he can get a mortgage. But he still really wants to own a home. It’s a matter of pride for him. In his mind, as it is for so many people, owning a home is a huge part of the American dream.
So he sees a sign, or reads an ad, that says “rent to own.” It’s like one of those rent-to-own places where you can rent an entertainment center with a huge TV in it for $29 a week. And after so many years you own the thing, eventually paying more than three times what it would have cost had you ponied up the cash up front. “Rent-to-own” real estate deals are a little different though no less treacherous. The biggest thing to consider is the “option fee.”
The right to “rent to own” is not free. It’s not cheap, either.
Let’s say you’re a shady landlord, and you need fast cash to pay gambling debts or meet a margin call at your stock brokerage. You’re feeling desperate. Your rents are set in stone for the most part, but you need extra money. This is where the “option fee” comes in. You decide to list one of your vacant properties as “rent to own” in the local paper. You get a call from the guy who really wants to own a house but needs to work on his credit first. Good news! He’ll take the house, option fee and all. The option fee is between 1% and 3% of the home’s future purchase price, which is locked in as soon as the buyer and selling sign the “rent to own” contract.
The buyer is so happy he can hardly contain himself. He’s going to be a home owner after all. It only cost him a couple thousand bucks to buy the time it’s going to take to rebuild his credit. Our shady landlord gets the $4500 he needs to pay his gambling debts.
- They didn’t talk to a mortgage professional to see if it was even possible for the “buyer” to repair his credit in the time allotted.
The landlord knows this. The landlord talks about his “mortgage experience” to reassure his buyer that he has plenty of time to repair his credit. He might even promise to help his buyer repair his credit.
- The buyer doesn’t take the time to read the contract. If he is unable to purchase the home in the time allotted, he will have forfeited his “option fee.” The contract also contains onerous terms, placed there by the landlord, about maintenance that the “buyer” didn’t notice and surely won’t fulfill.One of two things happen with this scam. If the buyer doesn’t repair his credit in time to sign the dotted line on a legit mortgage to purchase the home, he will forfeit his “option fee” to the shady landlord. Even if he does repair his credit, the landlord will point to the onerous maintenance clause in the contract and refuse to honor the deal. Either way the option fee is forfeited, and the buyer has very little recourse after signing the contract.
Lesson here? Never buy a house on a handshake. Always talk to a mortgage professional, even if you plan on doing a “rent to own” deal. A mortgage professional will be able to tell you exactly what you need to do, or of it’s even possible, to secure a mortgage in the allotted time frame.