A Rent to Own Guide

How To Identify A RTO Scam

Anytime money is being exchanged, there are bound to be some bad eggs looking to take advantage of people. Despite being a perfectly safe, tried and true method of home buying, Rent to Own (RTO) often gets a bad rap because scammers in the past have used faulty agreements to prey on underprepared and disadvantaged buyers. If you are looking to purchase a home using a lease-option agreement, knowing some of the red flags can save you time and money in the long term . . . and potentially save you from falling for a scam.

Unbelievable claims. If something sounds too good to be true, be wary of it . . . there's a strong likelihood it is. Organizations and private sellers offering below market rates on homes almost always have something up their sleeves. Scammers will offer things like no money down on RTO home purchases, exceptionally low rental rates, and more to try and lock you into a lease. Be smart before you sign.

Super high buy price. Understanding people's desire to own a home and the difficulties of securing a mortgage in our current lending climate, many buyers will up the price of their properties way above market value when advertising a Rent to Own home. This is really less a scam and more just nakedly taking advantage of people's dreams and ambitions. Knowing the market rate of homes in your area is something you should have down pat before you start shopping.

Outpriced from the start. Many scammy sellers have no intent of letting go of the property at the end of the sale. They will actively put people into RTO homes they know they won't be able to afford when it comes time to secure a mortgage with the sole objective of pocketing the option fee and rent credit in escrow (then repeating the process with another tenant-buyer). Be sure you know how much you can afford--and most importantly how much you can realistically get for a mortgage at the end of the lease--before you start hunting for a Rent to Own home.

Payments. When you exclude the rent credit, your monthly payments should not exceed the market rate for local rents by much. If you are paying, say, $1250 a month with a $250 credit and local rents for comparable properties are renting for $600 or $700, you are being taken to the cleaners by the seller. Once again, have a good idea what market rates in the neighborhood and surrounding areas look like before you sign on the dotted line.

Application fees before showing. If your buyer expects you to pay to see the property before you can see it, there may be something up. Posting listings for homes that don't exist or aren't on the market for the purposes of pocketing the application fees is a common scam used for both rentals and home sales.

Late payments rules. Read your lease option agreements carefully before you sign. Some sellers will include language that voids the purchase clause in the case of a single late payment, leading to the forfeiture of the rent credit and option fee. Consider consulting with a real estate lawyer to ensure the terms of the agreement are fair and beneficial for you.

Foreclosure. On occasion, scammers will put RTO listings up for housing that are undergoing foreclosure procedures or stop making mortgage payments on the home once the lease option agreement is signed. Two ways to protect yourself from this scam: put all rent credits and the option fee in escrow until you close on the house and check with the local Land Records office for any foreclosure notices or tax liens on the property. Escrow keeps the money out of the hands of the seller until the process is completed, making it impossible for them to simply walk away with the money. Make sure you pay for the monthly rent and the rent credit with two separate checks for the paper trail, that means never pay with cash!

Background check. Many RTO buyers will perform an extensive background check on the seller to ensure they don't have a history of fraudulent behavior. Buying a home is among the biggest investments a person can make and knowing who you are signing on with is smart, if only for piece of mind as you start the process.

Excessive interest rates. When it comes time to secure a mortgage, check with several lenders to get the best terms and conditions. A whole cottage industry has cropped up in the past few years designed to prey on people with lower credit scores, particularly low and middle income individuals, with high interest rates and strict terms. Rent to Own is designed to give you time to improve your financial profile, but if you will still end up locked in a predatory loan at the end of the lease term, it's strongly encouraged that you wait.

And always, never shy away from consulting with a professional. Buying a home is a major investment and having experts on your side is a great way to not only feel confident in your choice, but protect you from bad actors. With the proper preparedness and some shrewd decision making, you soon will be on your way to safely owning a home!