Indiana Supreme Court Deems Predatory Rent-to-Own Agreement Unlawful

By Lindsay Frankel
Inside Subprime: December 4

A recent Indiana Supreme Court decision nullified a rent-to-own agreement that caused repeated evictions for an east-side Indianapolis couple and called into question the legality of similar contracts. Critics say such contracts target low-income buyers with predatory terms, while proponents maintain that rent-to-own agreements provide access to housing for people who can’t get a home loan from a traditional bank.

In 2013, Katrina Carter and her then-husband signed a 30-year agreement with a realty firm that would let the couple become owners of a North Oakland Avenue home after making monthly rental payments for two years. Typically, landlords have a legal requirement to maintain the habitability of a residence, but because Carter and her husband had essentially agreed to a land-sale contract that would allow them to become owners, that requirement seemed to be waived. At the same time, the couple could be evicted if they failed to make on-time payments.

The couple could not afford to have the house inspected, and after agreeing to the terms found that the house lacked electricity and plumbing. Though Rainbow sent a handyman to help with repairs, court documents showed he did not seem cut out for the job. And because the couple had to pay for an Extended Stay motel room and storage unit while the repairs took place, they quickly fell into financial distress. They received an eviction notice even though they didn’t yet live in their home. After agreeing to pay $200 weekly, which increased their monthly payment, the eviction claim was dropped.

To save money, the couple moved into the unfinished house and began making repairs themselves with some help from the handyman. But in November of 2014, when they were unable to make a payment, the realty firm tried to evict the couple a second time. They were forced to increase their monthly payment again, leaving them with little income to fix the house or plan for emergencies.

In March 2015, the realty firm filed a third eviction claim. Carter and her husband appealed a small-claims decision that let the realty firm take possession of the property and filed a counterclaim of “fraud, breach of contract, and failure to meet landlord obligations,” according to IndyStar. The case went all the way up to the Indiana Supreme Court, which deemed the contract unlawful.

Even though the Indiana Supreme Court said the realty firm’s actions weren’t deceptive and the couple agreed to the terms, the contract didn’t hold up under the law because it didn’t protect the couple’s right to live in a habitable home. And while the decision doesn’t make anything illegal or throw out rent-to-own contracts altogether, it does put forth that the owner is required to fulfill the duties of a landlord until such a time as the title is transferred to the renters. That includes providing a safe and clean residence with working electrical and plumbing systems.

Rent-to-own contracts have been around for decades but became popular after the housing crisis, igniting controversy over predatory lending. Like payday loans, rent-to-own contracts are criticized for putting vulnerable borrowers at risk. A lawsuit brought against the same realty firm in 2017 accused the business of “reverse redlining” in an unprecedented case. The realty firm owner claimed their goal was to revitalize poor communities rather than target minorities.

But according to Fair Housing Executive Director Amy Nelson, the realty firm’s contracts were inconsistent with that claim. Aspiring homeowners would not be served by confusing agreements that allowed the firm to keep landlord privileges without providing a habitable residence.

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