Ilyce R. Glink
Inman News
I recently wrote about the trend toward rent-to-own, otherwise known as "lease with an option to buy." Lease-options have been around for a long time, as first-time buyers used them to get into homes and build up enough equity for a down payment.
While I think rent-to-own can work for some people -- including very desperate sellers who can't sell their homes outright but have interest from renters who could help the property generate enough cash -- not everyone likes them.
Q: Ilyce, [when it comes to rent-to-own] the facts are that less than 1 percent actually convert to sale and a number of states' attorneys general are investigating abuses in this area.
If these deals require a down payment or accrued deposit that is forfeited by the renter/lessee upon nonperformance, the deal becomes subject to a different level of disclosure and therefore compliance as a real estate transaction.
The seller/lessor is considered the stronger party and even possibly a professional, therefore held to a higher standard.
I would take great care to advise [the seller/landlord] that in some states they can find themselves under scrutiny by various city and state authorities for potentially a predatory transaction, made worse if an informed tenant or a tenancy activism organization like ACORN gets involved.
We have seen a number of wily or underhanded investors who use these techniques to leverage property values and returns from potential lease-options subject to some nasty oversight.
A: Of course, there are plenty of ways that a rent-to-own or lease-option situation can go bad. There are scam artists who pose as owners of a property and don't actually own it, which can cause tenants to be tossed out if the true owner emerges. There are also owners who take advantage of their tenants.
This is why I always suggest hiring a local real estate attorney who can help you go over a rent-to-own contract and suggest changes that will protect your legal options.
Q: Recently, I received a phone call from a coworker stating that he went to a seminar that was pushing a new financial product -- money merge account (MMA).
He explained to me how this product would accelerate your mortgage payoff and help you save thousands of dollars. He goes on stating that this MMA will require you to open a HELOC, draw upon it to pay your (primary) mortgage, and have any income that you make be deposited in this HELOC.
To me, this sounds so complicated. However, the real catch is that the agent who is pushing this product is charging a $3,500 setup fee.
After I did some research on this new product, I mentioned to him that there are other alternative ways to accelerate your mortgage payoff without taking out more debt -- i.e. additional principle payments and/or extra monthly payment at end of the year, etc.
I don't think this is a scam but wanted to let you and your readers know that there are agents trying to push this product, especially in this recent credit crunch we are in.
A: I'm glad you wrote. While some people don't consider the MMAs to be scams, I do consider them to be somewhat scam-like.
The idea has been around for a number of years. I first heard about it when a book was published on it by a guy from New Zealand or Australia. Basically, the book claims that if you put all of your income into a home equity line of credit account, and pay all your bills from the same account, you'll pay off your home loan in a few years instead of 30 years.
The way it works is that when the income comes in, it pays down your loan much more quickly, so you're technically borrowing less money for that month. When you draw checks on the account, you've had the benefit of the "float" of your money.
The only way I can see this working is if you spend a lot less than you earn. But if that's the case, you could easily pay off your loan quite quickly -- without spending $3,500. In fact, almost anyone can achieve nearly the same benefits by putting every spare cent toward a debt each month, be it a home equity line of credit, a credit card or a regular 30-year fixed-rate mortgage. Certainly, $3,500 would go a long way towards reducing the debt on most home mortgages.
I'm glad you thought it through and took a pass.
To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.
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Copyright 2007 Ilyce R. Glink
