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Rent to Own: What You Need to Know

Homeownership and Consumer

Rent to Own: What You Need to Know

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When clients seek advice about a “rent to own” problem, they usually need help with one of three types of agreements: leases that are incorrectly labeled as “rent to own,” leases with purchase options, or installment land contracts. 

CLS advises clients on what all three types of contracts mean, how they work, and what rights clients have under them.  Leases, even if they are improperly labeled, are just rental agreements for the use and possession of an apartment or a house and create a landlord/tenant relationship.

Leases with purchase options tend to be the most confusing agreements, because clients frequently believe that they have made a down payment toward the purchase of a property.  Actually, they have only purchased the “exclusive” right to buy the property for an amount, and within a time frame, that may or may not be clearly explained in the agreement.  These options can be for several thousands of dollars and are not returnable like security deposits.  Often the price of the property is inflated or the agreements have purchase terms that clients will not be able to meet.  Because this type of agreement involves the purchase of a property, clients may get help understanding leases with purchase options from either the Landlord/Tenant or the Consumer and Homeownership Units.

What is commonly understood to be “rent to own” agreements are contracts to purchase houses over time from owners, and are actually installment land contracts.  This agreement usually occurs when someone is renting out a home but wants to sell it without getting a realtor involved, or when a buyer/renter cannot qualify for financing to purchase the property outright.  The buyer acquires “equitable” or “beneficial” title when the agreement is signed, and makes installment payments towards the purchase of the property.  The seller keeps the deed in his or her name until the agreement is paid in full.  After the agreement has been paid in full, often many years later, a closing is held, and the seller transfers the deed.

Acquiring “equitable” title allows the buyer to enjoy the benefits of ownership such as being able to possess and improve the property.  However, because the seller retains legal title, the property cannot normally be used as collateral for a home equity loan.  Still, under Pennsylvania law, the relationship between the buyer and seller is treated like the relationship between a mortgagor, usually the borrower, and mortgagee, the bank or servicer.  For instance, buyers are entitled to pre-foreclosure notices giving them the chance to cure defaults in payments just like mortgagors.  Moreover, sellers have to file actions in ejectment to determine the title issues involved instead of just filing quick rental evictions actions.  In fact, the also IRS treats such agreements as sales and the buyer has the tax benefit of ownership, including being able to claim interest paid to the seller as deductible “mortgage interest.”  Most important, if more than six installments are due under the agreement, then the agreement is governed by Pennsylvania’s Installment Land Contract Law, which regulates the relationship between buyer and seller and incorporates various protections for buyers.

Despite these protections, buyers frequently encounter many problems including sellers failing to properly credit payments, filing evictions actions in an attempt to regain the property without proper process, continuing to take out mortgages and sometimes even selling the property to other people if the agreement was never recorded.  If you have experienced these issues of just want more information, feel free to seek advice with Community Legal Services, Inc.