Rent-to-Own Contracts – Enabling the American Dream of Homeownership, or Exploiting the Working Class?

LAUREN SABELLA—Homeownership has long been a part of the idea of the “American Dream” and is associated with upward mobility and entering the middle class. However, after the housing bust and the financial crisis, that dream has become unattainable for millions of Americans. Since peaking in 2005, the national homeownership rate has dropped 5%, a drop that is most concentrated among Hispanics, older millennials, and more economically depressed regions of the country. Those who lost their homes to foreclosure have returned to renting and will have to rebuild their credit, but it has become more difficult for new buyers to get mortgages.

In response to banks retreating from lending to those with poor credit, private investment groups have entered the market, buying up houses and making deals with low-income prospective buyers who the banks will not and cannot touch. These groups make deals with buyers called contract for deeds (or “rent-to-own” contracts), and the deal is akin to buying a home on an installment plan — but with a high-interest, long-term loan. The investment groups buy up cheap, often derelict houses from the government and contract with renters on the promise that the renter can build up “implied equity” with each monthly rental payment. There is no required independent inspection and the renter is responsible for making all repairs on the home, which often involves bringing the home up to code. This part of the housing market has flown under the radar, but an estimated three million people have bought homes through contracts for deed.

Supporters of the rent-to-own deals claim that they are helping those with poor credit “find a path to homeownership,” but critics have said that the contracts “take advantage of people’s desperation.” Often, the contractual terms require renters to pay for any repairs and give them only a few months to deal with outstanding code violations. In the worst cases, the homes are inhabitable, and may lack working heating and sewage systems. Often, customers do not fully understand the terms and requirements of their contracts, and without an inspection they cannot appreciate the risks they are assuming or what they are contracting to own. For example, one man spent over $12,000 on repairs and improvements and paid more than $17,000 toward the balance of his 30-year contract for a home that investment firm Harbour Portfolio Advisors of Dallas bought from Fannie Mae for $11,745. Most tenants walk away with nothing after sinking money into rent and repairs. As a result, the homes fall even further into disrepair as they are rented out to new inhabitants who are similarly lacking the financial resources to bring them up to code, while the investors pocket large profits.

According to the New York Times, these high-risk rent-to-own agreements are in a legal grey area and may not be enforceable in some states because they lack consumer protections. The National Consumer Law Center released a report calling for greater federal and state oversight of the sales, condemning the “toxic transactions” which provide only a “mirage of home ownership” and aggressively target African-American and Spanish-speaking consumers in poor communities.

Whether legislators will tighten or loosen restrictions on this rent-to-own agreements and address consumer protection concerns is an open question following the November 2016 elections. The legal concerns and enforceability of contracts for deed in different states is an area the legal community should continue to monitor. With a Trump presidency and a Republican controlled Congress, Forbes predicts that there could be a move away from “overly conservative lending,” making it easier for people to get mortgages to buy homes. However, the survival of Fannie Mae and Freddie Mac may be uncertain, which could lead to more expensive lending and the disappearance of 30-year fixed rate mortgage, a product that makes homeownership obtainable for many. Less conservative lending would reduce the demand for rent-to-own contracts as conventional mortgages become available to more families. On the other hand, without Fannie Mae, Freddie Mac, and the types of mortgages they provide, lower and middle-income people may turn to rent-to-own options in greater numbers than ever. The Republican Party’s draft platform in July called for a scale back in the government’s role in the housing market, which indicates that the comprehensive reforms recommended by the National Consumer Law Center are unlikely to be implemented any time soon.

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