Rent To Own - Is It A Scam?
I have been asked many times in my career if "rent to own" real estate purchases are a scam or if they are legitimate means in which a tenant can become a homeowner. So let me share with you my experience, which may not be reflective or representative of everyones experience, but it should shine a bit of light upon this subject which seems to always be something that tenants are curious about.
Is it a scam? Sometimes. Due to the fact that so many poor renters dream of home ownership, they are frequently targeted by scammers who prey upon this motivation. These scammers use various tricks and techniques to weasel money out of these dreamers. The most common scam I have seen is attempting to sell the property for more than its real value. The second most common scam is disappearing with or stealing the downpayment funds from the potential purchaser. These 2 scams make up the vast majority of the ways tenants are taken advantage of by rent to own scammers.
Is it ever not a scam? Possibly. There is potentially the ability for a seller to sell a property using a rent to own technique in which the tenant could become the owner. The mortgage companies even have mortgage products and policies which are designed to deal with these sorts of situations should they appear. So yes, it is possible, not likely, but possible.
How would it actually work? For a rent to own to actually work, the renter will eventually need to qualify to obtain their own mortgage and also to provide the required downpayment money. The most acceptable solution is that the tenant pays market price rent to the landlord over time as they possibly improve their credit, or lower their debts, or establish income or employment stability. The tenant is also expected to make additional payments towards saving up a downpayment at the same time. Thus, at some point in the future the tenant will qualify for a mortgage and have the acceptable amount of downpayment. This could take 1 year, it could take 5 years, just depends upon the tenant and their details.
So a renter could in theory rent a house, save downpayment, build their credit, and eventually buy it.
What is the reality? In my 23 years in Lethbridge real estate I have seen several scammers and I have seen a few well meaning landlords and a few well intentioned tenants who have attempted a successful rent to own. Of all of them that I have observed, not a single one has resulted in a successful transaction. Not a one.
Some have fallen apart because the landlord had a change of plans. A few fell apart because the buyer realized it was a ripoff or scam. Many fell apart because the tenant couldnt save downpayment. Most fell apart because the tenant could never at any point in the future qualify for a mortgage. This is significant and should point to the pitfalls in why rent to own is pretty much just a myth for most people. So when I get a phone call from a buyer or a seller who asks about Lethbridge rent to own properties, I quickly advise them that it is not much more than a dream.