Lawsuit targets local rent-to-own housing operator

An Indianapolis-based company that has purchased and rented out hundreds of houses in the city is being sued by a not-for-profit housing group and four former customers over what they are calling a “predatory and unlawful rent-to-own scheme.”

Rainbow Realty Group Inc. and its owner, James R. Hotka, were sued Tuesday by the Fair Housing Center of Central Indiana Inc. and individuals Nelly Espinoza, Mory Kamano, Marvin Martinez and Norma Tejeda.

The plaintiffs are seeking class-action status for their lawsuit, which was filed in U.S. District Court in Indianapolis by local law firm Cantrell Strenski & Mehringer and Washington, D.C.-based Relman Dane & Colfax.

The suit alleges Hotka, Rainbow Realty and affiliated firm Empire Holding Corp. target minorities with deceptive contracts that “saddle consumers with all of the disadvantages of renting and all of the disadvantages of buying” homes.

Rainbow’s actions violate several fair housing, equal credit opportunity act, truth-in-lending and condition-of-premises laws, the lawsuit alleges.

Rainbow, the lawsuit says, buys abandoned, rundown houses and sells them without performing repairs through rent-to-own contracts at prices three to five times higher than the purchase price.

The dwellings are often unlivable, with leaky roofs, flooded basements, faulty wiring and plumbing, mold, missing doors, and rodent or bug infestations, according to the suit.

The rent-to-own contracts typically carry interest rates ranging from 11.8 percent to 18 percent, and steep late fees that almost guarantee the buyer will begin missing payments shortly after entering into the agreement, the lawsuit said. That’s because most of the buyers will not be able to afford the monthly payments while also spending large sums to make repairs on the house.

“Defendants have built into their business model the expectation that most of their customers will not be able to maintain their monthly payments, and so screen out few if any customers,” the lawsuit says. “According to defendant Hotka, in 70 percent of the contracts, the buyer falls behind within the first six months alone and is summarily evicted.”

The lawsuit alleges that 95 percent of the contracts ended in eviction from 2009 to 2014, with 175 evictions taking place in the first four months of 2017 alone.

“Given the condition of their houses and their reliance on deception to ensnare victims, defendants need vulnerable customers to perpetrate this scheme,” the suit says. “Defendants target minority neighborhoods because they believe that, due to the historic denial of equal opportunities for good credit and homeownership, many people in minority neighborhoods are especially susceptible to this predatory scheme.”

Hotka, who says he has been in the real estate business since 1974, founded Rainbow in 1992. The company says it has bought and fixed more than 1,000 homes in the area since 1974.

Hotka could not be reached by phone at Rainbow Group on Tuesday afternoon despite several attempts.

The company also is fighting a separate lawsuit filed by the state in 2012 over the same alleged practices.

Rainbow disputes the charges in a statement on its website.

“The Indiana Attorney General has made allegations against Rainbow Realty Group and [has] published press releases which tell only one side of the story,” the statement says. “The AG complaint challenges our fair and just right to evict customers for non-payments. … We believe these claims are baseless and untrue. In fact, over the years we have helped hundreds of families and individuals become satisfied homeowners.”

The Fair Housing Center of Central Indiana, a not-for-profit founded in 2011 that tries to “ensure equal housing opportunities by eliminating housing discrimination,” said it has “interviewed dozens of people who put hundreds to thousands of dollars into their homes in the hope of getting their houses to a condition that was livable, depleting their finances, until eventually they were overwhelmed. They are then evicted, without any protection or recognition of the equity they had put into their homes.”

The four individuals joining the Fair Housing Center are all minorities who were evicted from houses by Rainbow Realty.

The suit says it is seeking compensatory, statutory and punitive damages for the four plaintiffs and others who join the suit.