Avoid Mistakes in Real Estate “Rent to Own” Agreements

I recently helped a family stuck in a bad real estate “rent-to-own” agreement. Jordan is a contractor who purchased a property with the intent to renovate and live in the property. He entered into an agreement with a real estate investor to buy a shell property in West Philadelphia. Unlike ordinary sales using traditional financing, the agreement called for a series of payments over a period of several years to the investor. After all payments were completed, the seller investor was required to transfer the deed.

Investors or home buyers like Jordan may find installment-payment agreements attractive if they have good cash flow but poor credit. The installment arrangement allowed Jordan to bypass the traditional barriers to financing that prevented him from obtaining a loan.

Jordan’s payment arrangement was not a rental agreement. Legally it is a sale of real estate called an “installment land contract”. But there is great risk to buyers in installment deals. The buyers often invest their labor and money into renovations during the installment period. What buyers like Jordan may not understand is that a default on the payment plan will cause the buyer to lose possession and forfeit all of the improvements invested into the property. Even worse, buyers to an installment contract do not have the benefit of consumer mortgage laws and procedures. It is much easier for a seller to an installment contract to declare default.

In Jordan’s case, he fell on hard times after he moved his family in and completed beautiful renovations to the kitchen and dining room. He was facing ejectment from the property and loss of tens of thousands of dollars in renovations. Fortunately, a settlement was reached prior to trial that allowed his family to stay in the home and complete the remainder of the installment payments.

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