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Why Rent to Own Is Bad

Why Rent to Own Is Bad

What’s the difference between a mortgage and rent to own? 

Some people think it doesn’t matter whether they buy a house with a mortgage or a rent to own deal.  On the surface, it seems the same.  They have to make payments every month for a long time, and, if they stop paying, the mortgage company or the seller takes the house.  But the details make a HUGE difference.  There are decades of legal protections that have been created for homeowners with mortgages.  Buyers in rent to own deals are far less protected.  When a problem develops, the buyer loses.

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. 

 

This is why doing rent to own is NEVER a good idea

MORTGAGE

RENT TO OWN

Owner gets a deed on at the start.  They are the legal and record owner. 

Buyer doesn’t get a deed until the final payment is made. 

Deed is recorded with the county Recorder of Deeds.  This protects the owner’s claim on the house. 

 

  • There is a formal record that the house belongs to the owner.
  • Any disputes regarding the house will require notice to the owner. 
  • No mortgages can be taken out without the owner’s consent. 

Contracts are rarely recorded.  Many contracts have provisions specifically prohibiting recording.  Most are not notarized, which is required for recording. 

  • Outside parties do not understand the buyer has a claim on the house. 
  • Buyers do not get notices when there are disputes about the house (tax debts, sheriff’s sales, etc.). 
  • The seller can still put new debts (mortgages) against the house without the buyer’s knowledge or consent.   

Mortgage may be transferred to a different company, but all the same terms apply, and the deal is not impacted. 

Unrecorded deals are unknown to other people.  This can be a big problem when the seller dies, becomes incapacitated, or sells the property to a third party.  New people often refuse to honor the deal.

All increases in value in the house belong to the owner.  If things go terribly wrong, the owner can “cash out” by selling the house, paying off the mortgage, and keeping the extra. 

Buyer doesn’t have the ability to sell the property on the open market.  Often, sellers will try to claim increases in property value for themselves.  If buyer struggles to make payments, they have no ability to “cash out” by selling the house.

Property can be transferred to owner’s heirs/family.  Federal law requires the mortgage company to keep accepting payments from the original owner’s heirs.

Sellers will often refuse to honor the contract if the buyer passes away.  Family members may struggle to get the benefit of the money the buyer already paid.  Seller may try to remove family, claiming the contract is cancelled. 

Mortgage companies require clean title when the mortgage is taken out, and title insurance is required to protect against unforeseen debts or ownership claims. 

Title searches are rarely done before entering rent to own deals.  Title insurance cannot be purchased by buyers in rent to own contracts.  Even with a title search done at the start, new debts or ownership claims can pop up in the middle of the deal. 

 

Owner has access to homeownership programs:

  • Local home repair assistance
  • State mortgage assistance when they fall behind on payments (HEMAP)
  • Local mortgage assistance programs when they fall behind on payments
  • Mortgage company work out programs
  • PA property tax rebate
  • Local tax repayment programs

 

Buyer is shut-out of most programs.

  • No home repair assistance
  • No state assistance when they fall behind on payments
  • No local assistance programs when they fall behind on payments 
  • Any work outs are at the discretion of the seller
  • Might be eligible for PA rent rebate
  • Might be eligible for local tax payment plan

Homeowner’s insurance is mandatory and protects both the owner and the mortgage company in the event of damage to the house.

Insurance companies will not write policies to buyers.  Sellers may require insurance, but they are typically listed as the sole beneficiary – the seller keeps all the money in a payout.  Buyers are left unprotected in the event of damage to the house. 

Local codes often treat owner-occupied properties different from rental properties.  Owners are not held to the heightened standards of a rental property.  

Local code enforcement may view the property as a rental or “tenant occupied” and apply the higher code standards.  This can lead to violation fines which the seller may try to pass on the buyer.  Seller may also demand that the buyer pay for any repairs or improvements to bring the house up to the heightened code requirements.  These codes are more financially burdensome on the buyer than a traditional owner would face. 

Right to an accounting of payments, access to documents, and a dispute process (RESPA) when a problem arises with the mortgage company.

Sellers rarely keep accurate records.  Seller often refuses to comply with accounting or document production requests.  No formal dispute resolution process.

When owner falls behind on payments, Act 91 notice or comparable federal notices must be sent to the owner.  Owner has a right to cure until the day of the Sheriff’s Sale. 

When buyer falls behind on payments, right to cure until entry of a judgment in litigation (eviction or ejectment).  Sellers often ignore the legally required notices and refuse to honor the right to cure.  

Foreclosure process is required to take back house if owner defaults on the mortgage.  Foreclosure is a slow process, and many counties have diversion programs, which provide the owner an opportunity to get back on track and save the house. 

Depending on the way the deal is written, either ejectment or eviction is the correct legal process. 

 

Eviction is extremely fast and limits the buyer’s ability to get back on track and save the house.  Most eviction courts are not prepared to handle the complexity of a rent to own transaction. 

 

Ejectment is slower, but still lacks the formal diversion programs designed to save houses.