Avoid Rent to Own deals involving properties under foreclosure

Discussion: The majority of rent to own deals involve a property under foreclosure or recently under foreclosure. In most real estate deals there are two parties, the Buyer and the Seller. As foreclosures are hitting an all time high, there is now a third party involved in the process, the “real estate investor” selling you a rent to own contract on another party’s property. In the past couple of years, foreclosures have hit an all time high. It is projected that these trends will continue. This has opened up the door to a large number of “real estate investors” who portend to “help” people out of foreclosure by putting together a rent to own contract. How does this work? Person A is losing their home to foreclosure. This data is available through public records. Person B, “the real estate investor,” contacts Person A and offers to “buy” their home through a rent to own contract. The real estate investor promises to buy Person A’s home for a set price in the future. Usually, the real estate investor requires that Person A sign over the legal title to him through a “quit claim deed” or a “deed in trust.” The real estate investor promises to locate a buyer who will in turn rent to own the property. The real estate investor is a middle man who earns large fees, sometimes without any investment in the property. Person A almost always ends up with the mortgages remaining in their name. So they have mortgages and legal responsibility for a debt on a property they’ve legally deeded to a third party. What does this mean to you if you are the Buyer on a rent to own that’s in foreclosure? You are paying rent to a third party who has legal title to the property, but who little or no investment in the property. You may be renting a property under foreclosure. You have no control over whether or not back taxes or back mortgage payments are truly being made. You may be evicted from the property if the bank forecloses on the property. This scenario presents great risk to you, the Buyer.

Greater risk involves entering into a purchase contract and a lease when you don’t have the capacity to succeed in the final transaction, buying the home with your own mortgage. Many books have been written, and seminars given, showing real estate investors how to legally take your money from you. You give them a down payment and sign a contract to purchase the property. But you already have an issue you’re your credit. How will that be mitigated? Can it be mitigated within the time frame of the contract? Some foreclosure/rent to own seminar programs boast that up to 40% of the Buyers default. They cheer when the Buyer loses his down payment as a result of failing to satisfactorily complete the contract. Then the real estate investor just goes on to the next naive Buyer and the cycle continues. The reality is that it can be very difficult for a Buyer, who already doesn’t qualify for a mortgage to succeed in the typical rent to own contract. That’s why it’s essential that you have a realistic and achievable goal of fixing your credit at the time you enter into a rent to own contract. Otherwise, you will not be able to fulfill your obligation to purchase the property and you will likely forfeit any investment you’ve made in the property.

If this section seemed complicated, that’s because it is complicated! Buying a home from an individual homeowner or a builder is complicated enough. Bringing in a 3rd party just makes it more complicated. That’s why the knowledge of point six below is so helpful.