Rent-to-own homebuying on the rise, and so are problemsby Jessica Mador, Minnesota Public Radio
As home prices drop and lending standards tighten, it's harder for people with bad credit to get a mortgage. As a result, alternative arrangements like rent-to-own deals and contracts for deed are on the rise.
Advocates say these deals can be a great way to finance a home, but they are also largely unregulated. State lawmakers are working on a bill designed to protect buyers and sellers by preventing some of the confusion that can arise from a lack of clarity in the law.
Newport, Minn. — Melissa Joseph, 28, thought her rental house in Newport was a lucky break. She and her fiance have shaky credit, so they can't easily qualify for a mortgage. They thought buying a house with a rent-to-own agreement was an easier path to homeownership. Instead, they are involved in a dispute with a landlord who Joseph said hasn't repaired the leaky roof as he promised. Joseph said she and the landlord have argued over who said what.
"I have record of saying that this is a problem, and I have record of you telling me to fix it, when it's written on the lease that you're supposed to fix it, and you're asking us to fix it for you," she said.
The landlord claims they agreed that Joseph's fiance would do the work. Both sides accuse the other of being dishonest.
But now, who promised what is beside the point, because the home has fallen into foreclosure. Under current law, that means Joseph's contract, and the thousands of dollars she put down, are gone. There is nothing in Minnesota law governing such rent to own deals. And that, said Lutheran Social Services' Dan Williams, is a big problem.
"I really worry that we are going to look back on 2009 and say this was the year of really bad contract-to-own agreements and really bad contract for deeds," he said.
Williams said the surplus of foreclosed homes in bad condition is attracting people looking for a cheap deal on a house. For many buyers, the only option may seem to be a rent-to-own arrangement or contract for deed with a cash-strapped seller. There are no hard numbers tracking this trend but there are widespread reports that these deals are on the rise.
As unsuspecting home buyers and desperate sellers collide, the lack of clarity in the law increases the financial risks on both sides, but especially for buyers. Williams said this has the potential to start a dangerous cycle similar to the subprime crisis that led the housing market to crash.
Contract for deed deals are different from rent-to-own, and contracts for deed are more regulated. But both are handled privately between individuals. Some state lawmakers are concerned that these deals are being used as a way to try and skirt home inspection and other requirements, and say they need to be brought out of the shadows.
There is a general consensus that there is a gap in the law. So, lawmakers and groups representing landlords and homebuyers are collaborating on an effort to bridge that gap by clarifying the law.
"We definitely support clarity," said Todd Liljenquist from the Minnesota Multi Housing Association, a landlord group.
Liljenquist is concerned that too much regulation would make these agreements impossible, but his group is not opposed to a law that creates a level playing field for buyers and sellers. He agrees the current situation can lead to confusion.
"Well, is this a contract for deed, I think it's a rent-to-own, I don't know exactly. Just because you call it a contract for deed but it's really a rent to own, does that matter. With some of the confusion that can come into play, clarity is certainly a better alternative," said Liljenquist.
People involved in writing the legislation say the law would require disclosure from buyers and sellers. It would offer guidelines to both parties on how to protect their interests. One guideline would recommend that tenants get properties inspected and appraised before signing.
Melissa Joseph's landlord Michael Schindler said it's true that would be buyers need more education to protect themselves when they enter into such agreements with landlords.
"A lot of people that have bad credit, that can't get a loan, aren't going to say, 'Yeah, well you need to give me proof that you are making the house payments,' but in this market you almost have to," he said.
Schindler said he's sorry for the trouble his foreclosure is causing Melissa Joseph and her family, but buyer beware.
Ultimately, he said, the onus was on them to make sure they were getting a good deal. For her part, Joseph is frustrated by how things turned out.
"The whole thing is ridiculous and, yeah, I do wish that there was a law in place so that people can't take advantage of you or basically make money off of you," said Joseph.
Advocates say they hope the new law will do just that.
- Morning Edition, 01/19/2009, 6:20 a.m.