Tag Archives: rent-to-own

Installment Land Contracts:  Uses, Abuses, and Legislative Proposals

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Professor Durham

Professor Freyermuth

 

 

 

 

 

 

 

 

 

Professors’ Corner

A FREE monthly webinar featuring a panel of law professors,

addressing topics of interest to practitioners of real estate and trusts/estates

Tuesday, January 9, 2018

12:30 p.m. Eastern/11:30 a.m. Central/9:30 a.m. Pacific 

Installment Land Contracts:  Uses, Abuses, and Legislative Proposals 

Speakers:

  • Professor Jim Durham, University of Dayton
  • Professor Wilson Freyermuth, University of Missouri

Moderator:

  • Professor Chris Odinet, Southern University Law Center and Visiting Professor, University of Iowa

In the wake of the mortgage crisis, several jurisdictions have seen a resurgence in the use of the installment land contract as a financing device. Use of the installment contract creates a number of risks, particularly in jurisdictions where existing precedent and/or statutory provisions do not clearly articulate the appropriate procedures for the vendor’s enforcement of contract following the vendee’s default. Some investors have sought to capitalize on this lack of clarity, effectively using installment contracts as the equivalent of “rent-to-own” contracts that provide for landlord-like default remedies while disclaiming any responsibility for the habitability of the property.

Professors Durham and Freyermuth will discuss the existing legal background governing the characterization and enforcement of installment land contracts and the wide variety of approaches taken by various states. They will also discuss the provisions and the merits of recent legislative proposals designed to regulate some of the more abusive uses of the installment land contract device.

Register for this FREE webinar program at https://ambar.org/ProfessorsCorner.

Sponsored by the ABA Real Property, Trust and Estate Law Section Legal Education and Uniform Laws Group

 

Caveat Rent-to-Own

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keys-1317391_1920WiseBread quoted me in 5 Things You Need to Know When Renting-to-Own a Home. It opens,

Your credit scores are too low. Or maybe you’ve run up too much credit card debt. Whatever the reason, you can’t qualify for the mortgage loan you need to buy a home. But there is hope: You can enter into a rent-to-own agreement and begin living in a home today — one that you might eventually be able to buy.

Just be careful: David Reiss, professor of law and research director for the Center for Urban Business at Brooklyn Law School, said that consumers need to be careful when entering rent-to-own arrangements. Often, these agreements end up with tenants losing money that they didn’t need to spend.

“Potential homebuyers should be very careful with rent-to-own opportunities,” Reiss said. “They have a long history of burning buyers. Does the law in your state provide any protection to a rent-to-own buyer who falls behind on payments? Could you end up losing everything that you had paid toward the purchase if you lose your job?”

These worries, and others, are why you need to do your research before signing a rent-to-own agreement. And it’s why you need to know these five key facts before agreeing to any rent-to-own contract.

1. How Do Monthly Rent and Final Selling Price Relate?

In a rent-to-own arrangement, you might pay a bit more in rent each month to the owner of a home. These extra dollars go toward reducing a final sales price for the home that you and the owner agree upon before you start renting.

Then, after a set number of years pass — usually anywhere from one to five — you’ll have the option to purchase the home, with the sales price lowered by however much extra money you paid along with your monthly rent checks. Not all companies that offer rent-to-own homes work this way. Some don’t ask for more money from tenants each month, and don’t apply any rental money toward lowering the eventual sales price of the home.

This latter option might be the better choice for you if you’re not certain that you’ll be able to qualify for a mortgage even after the rental period ends.

“A pitfall is if the tenant buyer signs into the program but will never be approved for financing, thus never purchases the house,” said John Matthews, president of operations of Chicago Lease to Own. “That is how the scammers out there have used rent-to-own to hurt people. They sell it to those who should never have been in the program and take their portion of the rent every month used ‘for the purchase of their home’ knowing that the tenant will never qualify to buy the home.”

Make sure you know — and are comfortable with — the home’s final sales price and monthly rent payments before you agree to a rent-to-own arrangement. And if you don’t want to pay extra in rent each month for a home that you might never end up buying? A rent-to-own agreement might not be for you.

Risky Rent-to-Own

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photo by Steve Snodgrass

The Pittsburgh Tribune-Review quoted me in Rent-to-Own Option for Home Shoppers Rife with Pitfalls, Experts Caution. It opens,

Finding the right rental house was more difficult than Phyllis Lombardi anticipated.

“It’s hard to find a big enough house that allows pets, for the number of people we have in South Fayette,” said Lombardi, 45. She and her husband have four children living at home.

The Lombardis are moving because the owners of the house they are renting want to sell. But the couple isn’t ready to buy. The husband’s income was cut by more than half when they relocated to the Pittsburgh area several years ago, and they are repairing their finances after a short sale on a home.

Finding no rentals in South Fayette that meet her criteria and price, Lombardi is going with an option suggested by her real estate broker: Pick a house for sale on the market and do a rent-to-own contract with an investor who would buy it.

Rent-to-own agreements require prospective buyers to pay rent with an option to purchase the house at a later date, usually within two to five years. It can broaden the options for people with checkered credit histories who think they might soon be in a position to buy.

But it is an industry with a lot of shady operators and which can prove costly to prospective buyers who are not careful, said David Reiss, a professor of law at Brooklyn Law School.

“In some cases, these programs are based on the idea of hope springs eternal,” Reiss said. “But a large percentage of them are likely to fail.”

The terms of these contracts vary, but renters often pay a premium above market price, with a portion of that going toward the eventual cost to buy the home.

Many times, renters reach the end of the agreement and are still unable to buy, forfeiting everything they have paid — rent, fees and any premium toward the purchase price — to the owner and walk away with nothing, said Max Beier, a real estate attorney Downtown.

“Traditionally, what you’re going to have in these agreements is a default provision that’s pretty harsh,” he said. “Commonly, you’re going to lose 100 percent of the equity you’ve paid.”

And many don’t come with the same renter protections. For example, maintenance and upkeep costs are often the tenant’s responsibility — just as if they owned the home.

Also, the penalty for late rent payments tends to be more severe than the standard 5 percent for a late mortgage payment, and even cause someone to be kicked out of the home, Reiss said.

“The rights you have as a tenant in a rent-to-own situation are not as clear and not as good as if you were a homeowner,” Reiss said.

Rent-to-Own Risks

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"Numbers 341 to 385 Lordship Lane N17" by A R Driver

Kroll Bond Rating Agency has released a CMBS Commentary, Rent-to-Own Deals Present More Risk than SFR [Single-Family Rental]. The commentary addresses the first rent-to-own securitization, one that Kroll is not rating. With rent-to-own, ” the tenant has the right to purchase the property it is currently renting in the future at a specified exercise price.” (1) With single-family rental, the tenant is currently renting a property from a large institutional investor without a right to purchase.

Kroll has identified a variety of risks that are specific to R2O deals. While some are specific to potential investors, others will also impact the tenants in these properties:

A primary concern was that the legality of purchase options associated with rent-to-own properties are largely untested and there is a possibility that these purchase options could subsequently be found to violate consumer protection and/ or predatory lending laws. If this occurred, it could result in considerable litigation costs for the securitization trust, as well as a cessation of advancing by the servicer. For example, if it was determined that the purchase option violated consumer protection laws, tenants in the applicable jurisdiction could potentially cease making rental payments under their leases, potentially causing a shortfall in the funds available for the borrower to make debt service payments under the mortgage loan and if the servicer failed to advance such amounts because it determined that advances were non-recoverable, this could result in a shortfall in the amounts available for distribution to the bondholders. Another risk present in the rent-to-own structure is a delay in the ability to foreclose on mortgaged properties that are subject to purchase options because the mortgages are subordinate to the purchase option right. As a result, the servicer may not be able to foreclose following an event of default under the loan unless the related purchase option period has expired. These risks are not applicable in standard SFR deals because the tenants do not hold purchase options with respect to the rental properties. (1)

I was somewhat skeptical that these types of securitizations would have much of a life once the housing bust worked itself out. It looks, however, like they might. Kroll is right to alert potential investors to the concerns outlined above. The CFPB and state regulators should also be looking at these cutting-edge transactions to ensure that residents of these homes are appropriately protected.

The Road to Rent-To-Own

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Rent To Own Sign

TheStreet.com quoted me in Rent-to-Own Homes Can Be a Risky Option for Buyers. It opens,

Instead of shelling out thousands of dollars to rent a home each month, some landlords give their tenants the option to buy the home while they are leasing it — using the rent they’ve paid as a credit toward their mortgage downpayment.

But while rent-to-own options appear like a winning proposition for potential homeowners who have not been able to save up enough money for a down payment or lack a good credit score, these deals can be fraught with many setbacks.

Each state is governed by different laws, and some of them protect homeowners in case they fall behind on payments, said David Reiss, a law professor at Brooklyn Law School. This is a crucial point that needs to be addressed with a lawyer before the contract is signed, because a consumer could end up “losing everything” that he had paid toward the house if he loses his job, Reiss added.

“Rent-to-own transactions can be very complicated and there are fewer consumer protections available, so interested buyers should beware,” he said. “There are a lot of shady operators out there.”

Wednesday’s Academic Roundup

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