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Rent-to-Own Homes: A Win-Win for Landlords, a Risk for Struggling Tenants

A new breed of landlord is blurring the line between renter and homeowner, but these firms claim they’re bringing homeownership to those who can’t get mortgages.

Federal and state regulators began looking into seller-financed deals after a front-page article in The Times in February highlighted the resurgence of these transactions. Seven United States senators recently wrote to the Consumer Financial Protection Bureau to express concern over the lack of protections for low-income home buyers.

Still, contract for deeds are at least subject to basic consumer-lending regulations like the Federal Truth in Lending Act, which requires firms to detail how much interest they are charging and how many payments prospective buyers must make before they own the house.

In most states, landlords are required to keep the homes and apartments that they rent in habitable condition. Some legal experts said contracts like the ones used by Vision could violate that requirement.

Cincinnati, for example, has an ordinance that requires rent-to-own landlords to adhere to building, housing and safety codes, as well as to “make all repairs and do whatever is reasonably necessary to put and keep the premises in a fit and habitable condition.”

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A new breed of landlord is blurring the line between renter and homeowner, but these firms claim they’re bringing homeownership to those who can’t get mortgages.

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Judith Fox, a professor of law at the University of Notre Dame, said that in most states landlord obligations cannot be waived. “If it’s a lease and they are claiming that none of the landlord-tenant obligations apply, then I would argue they have to adhere to federal truth in lending rules.”

She added, “You can’t have it both ways.”

Implied Equity

Vision, based here, buys homes spread across 24 states through nearly two dozen limited liability companies, all with different names like MI Seven, OH Seven and Kaja Holdings.

The firm advertises its properties on its website, through Craigslist and in handwritten signs posted on the lawns of properties promoting low monthly rents. Negotiations are done via phone or email, and prospective tenants are given a code to a lockbox on the door to inspect properties.

In-depth inspections can be difficult with the power turned off in a home before it is bought, however. Last September, Ms. Thomas signed a lease for a home on McHenry Avenue in Cincinnati that required her to bring the property into a habitable condition within three months. Vision’s contract offered to sell her the home for $27,000.

It was only after signing the contract that Ms. Thomas, 38, learned of at least three unaddressed property-code violations and about $5,000 in unpaid fines. She then sought a lawyer to get out of her contract and recover her $600 initial payment.

“It was like pulling teeth to get them to give me $600 of my money back,” Ms. Thomas said.

Within days, Vision found another tenant, a couple who moved into the same house. None of the building code violations had been addressed.

Edward Cunningham, a Cincinnati building department official, said the city had issued more than 20 notices to Vision on the property. “Communications have been very poor in this case,” he said.

There are $13,250 in unpaid citations on the McHenry home and the city has referred the matter to a collection agency. Vision bought the house from Fannie Mae for $9,300 in 2014.

Mr. Szkaradek, of Vision, said the firm had a small team that worked with municipal officials to address outstanding code violations. In subsequent emails, he said that Vision offered “a full and unconditional refund” to tenants within the first 30 days of a contract and that the firm had consulted with regulatory counsel in drafting its contract.

“Our goal is to put people into houses and turn renters into homeowners,” Mr. Szkaradek said during an interview at Vision’s offices in a two-story building on the outskirts of Columbia, S.C. He declined to comment on specific cases.

Mr. Szkaradek refers to Vision’s seven-year contract as a “hybrid lease” that enables renters to build up “implied equity” with each monthly rent payment. Vision works with clients to help them through the process of managing payments, he said.

Vision, which does not provide financing for tenants to buy homes, pointed to Mr. Rankin as one client it has worked with to help make a home livable.

In October, Mr. Rankin moved into his home after signing a contract that valued the three-bedroom house at $38,000. There was no carpeting and no linoleum on the floors, and the walls were covered with what Mr. Rankin described as a tar-like substance. These issues seemed easily fixable, though, Mr. Rankin said, because he runs his own flooring company.

But not even a craftsman like Mr. Rankin was prepared for the biggest problem with the house: a condemned septic tank that the local water department said needed to be upgraded.

The cost to install a new sewerage system was more than $8,000, Mr. Rankin said. Vision helped him find a contractor to make the repairs, but it rolled the cost into a new contract that revalued the purchase price of the home to $60,000 and increased his monthly costs by $65, to $470 a month.

“Financially, they kind of stuck it to me,” Mr. Rankin said. But, he added, “when you don’t have any options and someone is willing to work with you, it’s really a blessing.”

Vision paid $10,760 to the Department of Housing and Urban Development for the house last July.

Cheap Homes

“If you’re doubling your money off of people who are scraping by and you’re taking advantage of their vulnerability to enrich yourself, that is being predatory,” said Beryl Satter, the author of the 2009 book “Family Properties,” which chronicled the exploitation of black homeowners in Chicago.

Nearly half of Vision’s homes were bought from Fannie Mae, the government-backed mortgage firm, according to RealtyTrac.

A number of tenants and former tenants interviewed said they had hoped to buy homes from Vision either by ultimately getting a mortgage or saving cash to buy a home outright. But other tenants expressed concern they would end up losing the home.

That is what happened to Heidi Anderson, 45, whose two children and partner moved into a Vision house in Vassar, Mich., last fall. They spent the winter months without heat because the furnace had been submerged in water and no longer worked. The only thing they had to keep warm during a cold Michigan winter, she said, was an electric heater and a wood-burning stove in the kitchen.

Ms. Anderson said she called Vision several times about the furnace, but nobody got back to her, so she stopped paying rent. In February, Vision filed a nonpayment proceeding, seeking the family’s eviction and $3,100 in overdue rent. She sent a check to Vision, she added, but the company returned it, saying it was late.

Days before Memorial Day weekend, the family moved out, before the formal eviction. They have since moved into another nearby home through a contract-for-deed deal. It was the best option available because, Ms. Anderson said, she still could not qualify for a mortgage.

“There is a little bit of work, but mostly it’s cosmetic,” she said. “The furnace works.”

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