Almost every cable TV real-estate guru pitches them as great moneymaking techniques: lease-option contracts, also known as "rent-to-own" programs.
In some metropolitan areas, lawn signs, telephone poles and newspaper advertisements hawk them aggressively to modest-income and credit-challenged consumers who want to buy a home.
Stripped to its basics, the lease-option concept is sound: Buyers who have imperfect credit histories or insufficient cash for a down payment on a standard mortgage can instead rent a house for one or two years, pay a fee to the landlord for the right to purchase the property at a set price during the lease term, and even have portions of the monthly rent count toward a down payment.
At its best, it's a win-win deal: The tenants clean up their credit, pay thousands of dollars for an option to purchase, and presto - they've got part of their down payment, they're ready to talk to mortgage lenders and buy their own houses.
The landlord sells the property, often at a premium price, after 12 to 24 months of steady rent collections. Plus, the landlord keeps all the option money.
But there is a dark side to lease-option deals for unwary buyers - problems that could become increasingly commonplace as small-scale investors try to unload money-losing properties in softening real estate markets.
In Florida, the state attorney general is investigating one major lease-option promoter for allegedly defrauding dozens of clients by pocketing their option fees and failing to transfer houses when tenants were ready to buy.
In Texas, widespread consumer complaints about lease-option programs prompted the Legislature to pass new statutory standards that are set to take effect Jan. 1.
Under the new law, lease-option promoters will be prohibited from terminating contracts over minor lease disputes or late rental payments, and will need to have clear legal title to the properties they offer for sale using lease-options.
Robert Doggett, an Austin-based legal services attorney who lobbied the Texas Legislature on the issue, said lease-options "had become a racket here. You had all these mom and pop investors, who took seminars and learned to do lease-options as a way to make a million bucks without doing a lot of work."
Mini Timmaraju, Texas legislative director for the national consumer advocacy group, ACORN, said hundreds of families around the state have been recent victims of schemes that "put them into situations where they were paying a lot of money for something they'd never really get to own."
