Rent to own is a raw deal for tenant-buyers, many real estate and personal finance pros say. The balance of power is tipped too far in favor of the landlord-owner. Time is not on the tenant’s side. And too many other things can go wrong with the deal in general, leaving renters homeless (in a worst-case scenario).

Here are the biggest pitfalls of renting to own that you, as a prospective tenant-buyer, could encounter on the path to home ownership.

1. An Unclear Title

You’ve probably learned that before you sign any real-estate contract, you need to make sure the landlord-owner has clear certificate of title to the property, meaning that no one else can claim a right to it. If another individual – say, an ex-spouse – has an ownership interest, the seller will have trouble transferring title if you decide to buy. If the landlord-owner has a mortgage, home-equity loan or home equity line of credit (HELOC) on the property, the bank has a claim to it that will have to be satisfied before you can take over. The same is true if the landlord-owner has unpaid property taxes or income taxes and a tax lien has been filed against the property.

So far, standard stuff. The special problem in this case is that, even if the landlord owns the house outright and the property has a clear title when you sign a rent-to-own contract on March 1, the title could become encumbered on March 2 or at any point thereafter. (See Encumbrances And Nonpossessory Interests In Real Property.) If that happens, you won’t be able to close on the house unless the owner pays off the debt, and no contract you sign can guarantee he or she will follow through on any promise to do so. At best, you might be able to include provisions in the contract that gives you recourse if this happens. For example, the contract could say that the landlord-owner will return your security deposit and rent credit (an addition on your monthly rent, which goes towards the purchase price) if a cloudy title prevents you from exercising your option to purchase within a certain time period.

2. Expensive Home Repairs

Normally, you wouldn’t do a home inspection on a property you were going to rent. The inspection costs several hundred dollars, and the landlord is fully responsible for the cost and logistics of completing any repairs. You’d simply take a careful look at everything and maybe complete an inspection checklist documenting the unit’s condition with your landlord before you moved in.

In a rent-to-own situation, you need to get a home inspection before you even start renting. It’s a useless, extra expense to pay the monthly rent credit and/or an upfront option deposit for a place that needs additional, considerable investment to bring it up to par. Not only do you not want the expense and hassle of the repairs, but lenders won’t give you a mortgage for a home that’s in poor condition. They want collateral that’s actually worth the money they’re going to lend you to buy it.

Home inspections can’t tell you everything and sometimes even miss major things, but it’s worth getting a professional to try to spot expensive problems or problems waiting to happen. (To learn more, read Do You Need A Home Inspection?.)

3. A Financially Shaky Seller

The property isn’t the only thing that needs inspecting. Because of the unusual and complex nature of rent-to-own transactions and the ability of the seller’s financial problems to affect you, it’s important to do a financial background check on him or her before you even start renting. If the seller is not willing to go through this process, that’s a potentially bad sign.

Veteran real estate agent Wendy Patton, author of “Rent-to-Own: How to Find Rent-to-Own Homes NOW While Rebuilding Your Credit,” recommends that tenant-buyers ask the seller to sign an “authorization to release” letter, which allows you to get information directly from the seller’s mortgage company or lender. Patton also recommends hiring a title search company or attorney to make sure the title is not encumbered and asking the seller to provide you with copies of personal credit reports. Poor credit could indicate financial trouble. If the seller goes bankrupt, you probably won’t be able to complete the purchase.

4. Sloppy Contracts

Letting the seller provide the rent-to-own contract is one of the most common mistakes tenants make, says Elysia Stobbe, Jacksonville, Fla. branch manager for NFM Lending and author of “How to Get Approved for the Best Mortgage Without Sticking a Fork in Your Eye.” “Typically, the person who writes the contact has the most power in a negotiation,” she notes. “The seller can put in all the terms they want, and the buyer gets stuck either accepting them or trying to change them.”

Also, most buyers and sellers have no idea what needs to be included in the sales contract to be legitimate in the eyes of a mortgage lender’s underwriter, which could put the entire deal, and any of the buyer’s earnest money (like the option fee and the rent credits), at risk. From a lender’s perspective, “there must be either a lump sum deposit for the down payment or the monthly rent must be above the market average, with the difference going into an escrow account towards the down payment,” Stobbe says. “A combination of both is also acceptable.”

If you don’t want to take the initiative in writing the contract, you should at least hire your own real estate attorney to review it. He or she can point out clauses that aren’t in your favor and help you negotiate a more fair agreement. Another option might be to start with a do-it-yourself rent-to-own contract, available online for a few dollars, then work with an attorney to customize it. Since real estate laws vary by state, Stobbe says buyers should be sure to work with an attorney in the same locality as the property.

5. Avoiding Escrow (Services)

The rent-to-own universe is rife with predatory landlords who have no intention of ever selling their property, and who are just trying to collect above-market rent and eventually make off with your nonrefundable option deposit. For protection, you should use an escrow service. This neutral third party acts as a financial intermediary between you and the landlord. It will hold your option deposit and monthly rent credits until you buy the property, at which point it’ll return the money to you to put toward your down payment and closing costs. If the purchase option expires and you decide not to buy, the escrow service will remit those sums to the landlord. It will also turn over the money to the correct party in the event that either of you violates your end of the agreement in a way that can’t be remedied. (Learn more in Who manages an escrow account?)

It’s not just for your protection: Banks and mortgage lenders like to see that the money is in an escrow account, Stobbe notes. It ensures they won’t go to the work of qualifying you for a loan and underwriting it, only to have an unethical landlord refuse to return the funds and prevent you from closing.

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Distressed California Homeowners May Qualify for California’s Keep Your Home California Transition Assistance Program.
If your financially distressed California clients can no longer afford their homes and are pursuing a short sale or a deed in lieu of foreclosure, they may be eligible for financial help with their relocation to alternative housing.

Up to $5,000 in transition assistance to qualified homeowners who can no longer afford to stay in their homes.

All that is required for homeowners is that they maintain their property until their house is sold or returned to the lender via a negotiated deed in lieu of foreclosure.
For qualified homeowners, these state funds may be used in addition to any other transition assistance that the homeowner may receive by participating in the Federal Home Affordable Foreclosure Alternatives (HAFA) program or in any other pre-offer short sale program.

To learn more about the Transition Assistance Program’s guidelines, and how you may qualify, click here and call us today.

When “CBS This Morning” co-host Norah O’Donnell asked the chief executive of Zillow recently about the accuracy of the website’s automated property value estimates — known as Zestimates — she touched on one of the most sensitive perception gaps in American real estate.
Zillow is the most popular online real estate information site, with 73 million unique visitors in December. Along with active listings of properties for sale, it also provides information on houses that are not on the market. You can enter the address or general location in a database of millions of homes and probably pull up key information — square footage, lot size, number of bedrooms and baths, photos, taxes — plus a Zestimate.

Shoppers, sellers and buyers routinely quote Zestimates to realty agents — and to one another — as gauges of market value. If a house for sale has a Zestimate of $350,000, a buyer might challenge the sellers’ list price of $425,000. Or a seller might demand to know from potential listing brokers why they say a property should sell for just $595,000 when Zillow has it at $685,000.
Disparities like these are daily occurrences and, in the words of one realty agent who posted on the industry blog ActiveRain, they are “the bane of my existence.” Consumers often take Zestimates “as gospel,” said Tim Freund, an agent with Dilbeck Real Estate in Westlake Village. If either the buyer or the seller won’t budge off Zillow’s estimated value, he told me, “that will kill a deal.”Back to the question posed by O’Donnell: Are Zestimates accurate? And if they’re off the mark, how far off? Zillow CEO Spencer Rascoff answered that they’re “a good starting point” but that nationwide Zestimates have a “median error rate” of about 8%.

Whoa. That sounds high. On a $500,000 house, that would be a $40,000 disparity — a lot of money on the table — and could create problems. But here’s something Rascoff was not asked about: Localized median error rates on Zestimates sometimes far exceed the national median, which raises the odds that sellers and buyers will have conflicts over pricing. Though it’s not prominently featured on the website, at the bottom of Zillow’s home page in small type is the word “Zestimates.” This section provides helpful background information along with valuation error rates by state and county — some of which are stunners.
For example, in New York County — Manhattan — the median valuation error rate is 19.9%. In Brooklyn, it’s 12.9%. In Somerset County, Md., the rate is an astounding 42%. In some rural counties in California, error rates range as high as 26%. In San Francisco it’s 11.6%. With a median home value of $1,000,800 in San Francisco, according to Zillow estimates as of December, a median error rate at this level translates into a price disparity of $116,093.

Some real estate agents have done their own studies of accuracy levels of Zillow in their local markets.

Last July, Robert Earl, an agent with Choice Homes Team in the Charlottesville, Va., area, examined selling prices and Zestimates of all 21 homes sold that month in the nearby community of Lake Monticello. On 17 sales Zillow overestimated values, including two houses that sold for 61% below the Zestimate.

In Carlsbad, Calif., Jeff Dowler, an agent with Solutions Real Estate, did a similar analysis on sales in two ZIP Codes. He found that Zestimates came in below the selling price 70% of the time, with disparities ranging as high as $70,000. In 25% of the sales, Zestimates were higher than the contract price. In 95% of the cases, he said, “Zestimates were wrong. That does not inspire a lot of confidence, at least not for me.” In a second ZIP Code, Dowler found that 100% of Zestimates were inaccurate and that disparities were as large as $190,000.

So what do you do now that you’ve got the scoop on Zestimate accuracy? Most important, take Rascoff’s advice: Look at them as no more than starting points in pricing discussions with the real authorities on local real estate values — experienced agents and appraisers. Zestimates are hardly gospel — often far from it.

Originally reported By Kenneth R. Harney, Los Angles Times  kenharney@earthlink.net Distributed by Washington Post Writers Group.

Getting a mortgage if you have a foreclosure on your record has its challenges but is not impossible to overcome. While your credit will take a big hit after foreclosure, you may be able to get another mortgage after some time passes. We have composed a chart to detail exactly when you can get a mortgage after bankruptcy, a shortsale, or foreclosure?

Conventional Financing

Derogatory Item	Waiting Periods
Foreclosure	7 years form date Home was given back to the bank. No owner participation. 7 years from date foreclosure completed and transferred back to bank if they had NO extenuating circumstances.3 years from date foreclosure completed and transferred back to bank with acceptable extenuating circumstances AND 10% Down Payment. Primary home purchase and rate/term refinance only. Non-owner and second homes not allowed.
Short Sale Deed in Lieu of Foreclosure	7 years for an Short Sale: Home sold but sales price didn’t cover amount owed Deed in Lieu: Home returned to lender in exchange for canceling loan 7 years from date sale closed and transferred to new owner or transferred back to bank for less than 10% down payment4 years from date sale closed and transferred to new owner or transferred back to bank with 10% down payment,2 years from date sale closed and transferred to new owner or transferred back to bank with 20% down payment2 years from date sale closed and transferred to new owner or transferred back to bank possible with acceptable extenuating circumstance/ and 10% down payment.
Bankruptcy Chapter 7	Debts are discharged through BK, client does not pay any debts owing 4 years from discharge date2 years from discharge date possible with acceptable extenuating circumstance
Bankruptcy Chapter 13	Debts are paid back on a monthly scheduled payment plan by client 2 years from discharged date4 years from dismissal date

FHA Financing

Derogatory Item	Waiting Periods
Foreclosure Deed in Lieu of Foreclosure	Foreclosure: Home was given back to the bank — No owner participation Deed in Lieu: Home returned to lender in exchange for canceling loan 3 years from date foreclosure completed and transferred back to bankLess than 3 years, but not less than 12 months from date foreclosure completed and transferred back to bank may be acceptable if the result of acceptable extenuating circumstances2
Short Sale	Short Sale: Home sold but sales price didn’t cover amount owed 3 years from date sale closed and transferred to new owner. No waiting period if borrower had no late payments on any mortgages and consumer debts within the 12 month period preceding the short sale AND they are not taking advantage of declining market conditions.
Bankruptcy Chapter 7	Debts are discharged through BK, client does not pay any debts owing 2 years from date of discharge with re-established credit paid as agreed or no new credit obligations incurred.Less than 2 years, but not less than 12 months from date of discharge may be acceptable if the bankruptcy was caused by acceptable extenuating circumstances2 and borrower has since exhibited a documented ability to manage financial affairs in a responsible manner.
Bankruptcy Chapter 13	Debts are paid back on a monthly scheduled payment plan by client 1 year payout period under bankruptcy has elapsed and the borrower’s payment performance has been satisfactory and all required payments made on time.

VA Financing

Derogatory Item	Waiting Periods
Foreclosure Deed in Lieu of Foreclosure	Foreclosure: Home was given back to the bank — No owner participation Deed in Lieu: Home returned to lender in exchange for canceling loan 2 years from date foreclosure completed and transferred back to bank12-23 months from date foreclosure completed and transferred back to bank if credit reestablished and paid as agreed and was caused by acceptable extenuating circumstances3.
Short Sale	Short Sale: Home sold but sales price didn’t cover amount owed 2 years from date sale closed and transferred to new owner. No waiting period if borrower had no late payments on any mortgages and consumer debts within the 12 month period preceding the short sale AND they are not taking advantage of declining market conditions.
Bankruptcy Chapter 7	Debts are discharged through BK, client does not pay any debts owing 2 years from date of discharge12-23 months from date of discharge if credit re-established and paid as agreed and was caused by acceptable extenuating circumstances.
Bankruptcy Chapter 13	Debts are paid back on a monthly scheduled payment plan by client 1 year payout period under bankruptcy has elapsed and the borrower’s payment performance has been satisfactory and all required payments made on time

USDA Financing

Derogatory Item	Waiting Periods
Foreclosure Deed in Lieu of Foreclosure Short Sale	Home was given back to the bank — No owner participation Deed in Lieu: Home returned to lender in exchange for canceling loan Short Sale: Home sold but sales price didn’t cover amount owed3 years from the date the foreclosure was completed and transferred back to the bank. Less than 3 years from date the foreclosure was completed and transferred back to the bank may be considered with acceptable extenuating circumstances
Bankruptcy Chapter 7	Debts are discharged through BK, client does not pay any debts owing 3 years from date of discharge.Less than 3 years from date of discharge may be considered with acceptable extenuating circumstances4
Bankruptcy Chapter 13	Debts are paid back on a monthly scheduled payment plan by client 1 year from the date repayment was completed and bankruptcy discharged.Less than 1 year from the date of discharge may be considered with acceptable extenuating circumstances

Examples of acceptable extenuating circumstances (circumstances must be verified and documented)
1. Conventional: nonrecurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.
2. FHA: Serious illness or death of a wage earner. Divorce and the inability to sell a property due to a job transfer or relocation to another area does not qualify as an acceptable extenuating circumstance.
3. VA: Unemployment, prolonged strikes, medical bills not covered by insurance, etc, Divorce is not viewed as beyond the control of the borrower and/or spous
4. USDA: loss of job; delay or reduction in government benefits or other loss of income; increased expenses due to illness, death, etc. Circumstances surrounding the adverse information must have been temporary in nature, and beyond the applicant’s control, and have been removed so their reoccurrence is unlikely or the adverse action or delinquency was the result of a refusal to make full payment because of defective goods or services or as a result of some other justifiable dispute relating to the goods or services purchased or contracted for.

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Most buyers seek out the assistance of a professional. In fact, according to the National Association of REALTORS®, 8 out of 10 home sales involve the assistance of a real estate professional. Using a Realtor will help expedite the search, and give you a source for answers to many of your questions.

You’ve probably used the term “Realtor®” many times. It’s often used incorrectly to mean real estate salesperson. Companies like Xerox, Kleenex, and Formica have been fighting the same battle for many years. When you hear the brand Xerox used to refer to a copier machine or Kleenex used in place of tissue, you can quickly see how frequently trademarks are misused.

The term Realtor should only be used to define real estate professionals who are members of the National Association Of REALTORS®. You might find it interesting to know that not all real estate salespeople are Realtors. And, there’s a big difference between the two!

Realtors are required to adhere to a strict Code of Ethics and Standards of Practice. This means they have rules to abide by, and have pledged to conduct themselves professionally. In California, most Realtors are members of The California Board of REALTORS®. Through their membership, they are also members of the California State Association of REALTORS®, and the National Association of REALTORS®.

When selecting a Realtor, it’s also important to choose someone who is a participant in The Multiple Listing Service. You may have also heard the terms “Multiple Listing” or “MLS.” And while you will not directly interact with the Multiple Listing Service, it may play an important role in finding the home you decide to buy. There are Multiple Listing Services across the country. On Long Island, the largest is The Multiple Listing Service of Long Island. It is, in fact, one of the largest MLS’s in the country, with a computerized network of over 1,550 real estate offices located throughout Nassau, Suffolk, Queens and Brooklyn. Within this network of real estate offices, there are more than 12,000 licensed real estate brokers and agents who work cooperatively, sharing their listings, and agreeing to conduct themselves and their businesses according to the rules of the MLS, and The REALTOR® Code of Ethics.

When you see the Blue MLS sign in the window, that means that not only is this office a part of the computerized network I just spoke about, but that the agents in MLS participating offices are all Realtors.

By now, you’ve probably surmised, selecting a professional MLS REALTOR® is very important!