Rent-to-own Agreements: A Dangerous Way to Buy Real Estate
Rent-to-own agreements are contracts for the sale of land where a buyer pays a down payment and some amount of rent over time in order to purchase a home. In Pennsylvania, these are sometimes referred to as Installment Land Contracts, and depending on where the property is, they may be governed by the Pennsylvania Installment Land Contract Law (PILCL). However, the majority of counties are governed by common law in this area.
Common elements of an installment land contract include a down payment, monthly installment payments and a balloon payment, which is a final lump sum due to purchase the property. Rent-to-buy contracts are often made for buyers who have trouble obtaining financing. They can be a way for someone to rebuild credit over a term of five to ten years and then obtain a mortgage to pay the balloon payment at that point. Unfortunately, installment land contracts can end up being a trap for the unwary seller. Even after five or ten years, some buyers will struggle to rebuild their credit. Also, the contracts often are written in such a way that even a single missed payment allows the seller to repossess the property and deprive the buyer of all equity.
Buyers are at risk in these arrangements
Installment land contracts fall into a legal gray area because they are not technically mortgages and are often not recorded with the recorder of deeds. Thus, the buyer of the real estate does not have the protections of the foreclosure process when they default (or are alleged to have defaulted). Yet, since the contract is not technically a lease agreement either, the buyer usually does not enjoy the benefits and protections of the Landlord and Tenant Act. Installment land contracts end up being litigated frequently in court because they can result in extremely inequitable situations.
Sometimes sellers get burned by rent-to-own agreements
Sellers also can be burned by these agreements. When the price of real estate dramatically increases during the term of the contract, a buyer may stop making payments and refuse to vacate the property, leading to an expensive ejectment action. If the buyer is sufficiently angry, the seller might have to deal with vandalism and purposeful destruction as a result. While these can be addressed in criminal court, that is often not good news to the seller who does not recover the value of the damaged property.
The benefits of rent-to-own agreements
So if installment land contracts are risky, why do so many people try to rent-to-own? For one thing, if you have poor credit, this is a great way to get a mortgage without going through a bank or commercial lender. For buyers with good credit but many mortgages, this is a way to expand your book of real estate without further stretching your resources. And for sellers with a damaged or strange property, the potential pool of interested buyers increases when you offer seller financing.
In general, we advise clients against installment land contracts because they can cause so many problems. For some clients, however, it still is the best option for purchasing a home.
Best practices in a rent-to-own agreement
Accordingly, if you are considering an installment land contract, here are several things to keep in mind. First, we recommend making a substantial down payment to ensure significant equity in the property. This allows both sides to have some amount of buy-in. Second, it is vital to have a clearly and carefully worded contract. The agreement should provide a clear picture of the obligations of both parties. Third, accurate record-keeping by the seller is key. This is important for ensuring that all requested periodic statements are furnished to the buyer. A violation of this requirement by the seller can result in the buyer canceling the contract and recovering at least a portion of the installment payments made.
Conclusion: Call Cornerstone Law Firm for your consultation
If you’re entering a rent-to-own agreement or having trouble with one you’ve already signed, call the real estate attorneys at Cornerstone Law Firm. We’ll walk you through the law and statutes that apply to your situation and help you figure out how to protect your interests.
