UK watchdog signals action on 'rent-to-own' credit sector

The Risks Of Rent-To-Own Purchase Scams 

Many younger investors lose money in rent-to-own schemes where they try to buy a house they cannot; in normal circumstances, they may not have the money for the down payment or problems with their credit data. 

It is a type of hire purchase scheme where the customers are asked to pay regular instalments to purchase outright, but the overall cost gets very high compared to other forms of high-cost credits. In this case, the rent-to-own company Brighthouse was asked to pay 14.8m pounds to consumers who lost to such deals. 

Britain's watchdogs have been looking at options to cap the payday loan interest charges to stop buyers from investing in such expensive/wrong deals. The FCA published a review of conclusions on the high-cost credits and found people suffered hardship in paying back for such purchases.

How Does It Happen?

Many investors do not have attractive credit scores, and they do not have enough savings for the down payments to make purchases. Consequently, they are attracted to rent-to-own scenarios where the buyer and sellers agree to let the buyer live in the house while paying rent.

Such schemes can go wrong when the house offered for agreement is in such a poor condition that it could not have been sold in normal circumstances, or there is expensive work required in the house after signing the contract, or the seller does not hold the property in the customer's name, or they have not paid the taxes, or the house is listed for foreclosure.

Even in legitimate cases, the client may have to pay upfront fees or a very high monthly rent, where if they miss an instalment, the agreement is cancelled.

In addition, some who own such houses pay for utilities like a fridge and washing machine covered in the rent, which they do not keep later; even after paying for the house, they are locked into an agreement where they have agreed to pay more for the home than its exact value.

How To Identify The Risk Factors?

• If such firms' offers are expensive, they may put adverts telling those who cannot secure a mortgage. On the other hand, such deals may offer old houses with low sale prices or rent.

• The houses without photos show the seller is hiding some information for a reason.  

• The emails sent by the seller with poor grammar or mistakes/typos indicate the person is unprofessional.

• The seller seeks information from the buyer before they can see the property.   

• Another red flag is the unclear contract, where you are threatened that minor infringement will lead to the cancellation of the contract.

• Sometimes, after signing the contract, one could not qualify for a mortgage to finish paying off the house.

How To Protect Yourself?

Check the credentials of the seller/owner and the current market value of the property. Then, before signing the contract, get a title report and meet the original owner, who can show the tax bills and related documents to ensure the legality and status. 

Next, check with a local rental agency about the rents and take advice from an attorney to analyse the clause's contract conditions – words and legal impact. The local analysts may accurately inform the home's selling price, valuation, and tax dues.

Also, make sure about how to pay option fees and costs and or determine if something goes wrong during the lease term; for example, consider the situation when the buyer cannot get the mortgage loan. Do not pay for charges upfront as an application fee. Check all the details to know what can go wrong with the deal.

Tell reputed financial advisors about your ability to buy the asset. The fraudsters often target people who do not have a clear idea of their abilities to pay rent. They target those uninformed about the local rental trends and ask them to pay more with a clause to pay charges if they cancel the contract.

In the case of scams, the homeowner lies about the house's real value, and without an appraisal, the buyer makes larger down payments. They also trick through fine prints in contracts where the customer faces eviction for missing a payment by some days, and in such cases, they may even lose all the previously made payments.