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Warning Signs to Look for in a Home Purchase Deal

Warning Signs to Look for in a Home Purchase Deal

If these things are so bad, they must be illegal, right?

Sadly, no.  While some versions of these transactions can cross the line into illegal, the basic transaction is not.  Pennsylvania allows installment sales contracts for real estate.  In some parts of the state, there are even special laws for these types of contracts.  You should never enter into a bad deal on the hope that the law will protect you when a problem develops.  You should avoid a bad deal altogether. 

Here are the red flags to help you identify a potentially predatory transaction:

The seller who refuses to put the deal in writing.  As a rule, any contract involving land or a house should be in writing.  If you ever encounter anyone who makes verbal promises, but refuses to put those promises in writing, you should walk away. 

  • The seller who refuses to provide receipts, or who will only take cash.  Any failure to make payments could potentially cancel the contract, causing the buyer to lose all the money they have put into the house.  Having a clear, traceable, payment history acknowledged with receipts by the seller can be vital to a buyer when a dispute arises. 
  • A large deposit or down payment to start.  These contract always say the seller keeps the money, even if the buyer walks away.  Paying a large deposit upfront puts the buyer at risk of losing that money if a problem develops. 
  • The tenant/buyer is required to pay for repairs to the house.  This is the most problematic part of these deals.  Scammers and exploitive investors try to push all responsibility for the repairs onto the buyer.  Buyers cannot access home repair programs designed to help low-income homeowners.  When a major repair becomes necessary, the buyer may not be able to afford the repair, and the seller refuses to do the repair.  The result is often the buyer is stuck living in an uninhabitable house.  If the buyer wants to move, the seller never pays the buyer back for the repairs and improvements the buyer made to the property.  
  • A large payment at the end to get the deed.  Another trap is a contract where the final payment is a large lump sum.  Often, these deals are sold with the idea that “you’ll work on the credit, then you’ll get a mortgage.”  But what happens if you get to the end and you don’t get a mortgage?  The answer: You forfeit everything you already paid, and the seller kicks you out.  This is a recipe for disaster. 
  • Only a small part of the monthly payment is applied to the purchase price.  Sometimes, the contract is silent about how the monthly payment is applied.  Sometimes, the contact says only part of the payment goes towards the purchase – either a set dollar amount, or a percentage.  In some parts of Pennsylvania, this practice is specifically illegal.  In other parts, it’s legal.  Regardless, it’s exploitive and unfair to the buyer.  
  • A clause that says payments are for purchasing the house, but if you don’t finish buying, those payments are “forfeited” or “surrendered” or “become rent.”  These provisions are universally problematic.  A buyer pays money expecting it will be applied towards the purchase.  They also spend money fixing up the house expecting they are building equity.  The buyer expects a deed at the end of the deal.  But if something happens, they lose every penny of their investment.  It’s exploitive and unfair to the buyer.