Most Americans who want to own a home — and can afford it — follow a fairly straightforward path to their dreams. They start with a loan from a bank or mortgage company, institutions subject to state and federal regulations. When buyers close in on the property they want, the deal is registered with the government, usually at county offices.
Americans who don’t qualify for a conventional mortgage but still want a home of their own sometimes opt for a loosely regulated financial arrangement called a deed contract. In these transactions, sellers function as lenders. They receive an initial down payment and then monthly payments.
Buyers under contract for deed agreements usually pay taxes and insurance and they often pay the tab for improvements and repairs on the property, before they even have title.
Often, it is not until the buyer makes final payment that title passes from seller to buyer.
Real estate experts, lawyers and consumer watchdog groups say these arrangements — and similarly structured lease-purchase agreements — rarely end with the buyer who owns the home. What tends to happen instead is that the buyer loses through a process called forfeiture – often for falling behind on payments – while recovering none of the equity he would have accrued in a traditional mortgage.
For example, when the Attorney General of Pennsylvania sued a company that had entered into hundreds of lease-to-own agreements in that state, he found that only 2% of buyers had successfully obtained the deed, meaning they were now owners.
“(Contracts) can be written in a way that makes it nearly impossible for them to succeed,” said Alex Kornya, general counsel for Iowa Legal Aid. “You lose every dollar you invested in that house and the contracted seller walks away with a total windfall.
In Iowa, there have been nearly 3,700 deed contracts registered in county offices since 2008, according to figures provided to the Midwest Newsroom by ATTOM, a mortgage data provider.
The numbers were lower in Kansas, Nebraska, and Missouri, but the numbers likely underestimate the number of agreements made in those states, as they have little or no laws requiring such agreements to be registered in county offices. .
Lance Lowenstein, an attorney in Kansas City, Missouri, says he sees cases involving those contracts about once a week.
“Deed contracts are a lot like ‘buy here, pay here’ car lots for real estate,” he said in an interview at his office in northeast Kansas City, home to many immigrants and communities in economic difficulty.
Deed contracts — also known as land contracts, installment sales, or deed bonds — proliferated nationwide and especially in the Midwest in the wake of the 2008 subprime mortgage crisis. Purchase – sometimes called leases with option to buy – have similar characteristics that often transfer the benefit of these transactions to sellers.
Investors, ranging from small buyers with just a few homes to Wall Street hedge funds, rushed after the housing crisis and bought properties in bulk from foreclosure or from sponsored mortgage buyers. the Fannie Mae government and Freddie Mac. Homes, often uninhabitable or in poor condition and located in low-income communities, are typically marketed to those most at risk of exploitation: black, Latino or immigrant residents.
And while state attorneys general in the Northeast and Great Lakes region have made large-scale contracts for deed or hire-purchase sellers who use deceptive tactics, attorneys general in the Midwest take no not often coercive measures.
A 2019 study by Harvard University’s Joint Center for Housing Studies describes an earlier era of deed contracts in Chicago, where blockbusting and redlining drove down house prices in the 1960s and 1970s. Investors used the sales contracts to sell properties at inflated prices with high interest rates to people who couldn’t get a conventional mortgage.
“These contracts were designed to fail,” the Harvard study said, “allowing the seller to recover ownership, a form of equity stripping.”
Taz George, senior research analyst at the Federal Reserve Bank of Chicago, said access to mortgages is an important way for families to build wealth.
George, co-author of the Harvard study, said lenders rarely underwrite loans in low-income communities where homes cost less than $100,000 and are often in need of repairs. Thus, deed contracts sometimes fill the void.
“Really, what we’ve found is that communities that have a high number of land contract sales, have a whole host of other housing and economic issues,” George said.
Deed contracts are marketed as a way for people who can’t get a conventional mortgage to fulfill the dream of owning a home.
“It’s exactly the same argument that payday lenders use. It’s not new: ‘We have to exploit low-income people, otherwise their life will be worse,'” Kornya said.
While never ideal, lawyers and experts say deed contracts can be one of the few options for some real estate transactions. Buyers who don’t have a credit history, have damaged credit, or can’t make a down payment often don’t qualify for a loan from banks or mortgage companies.
Echoing Harvard’s findings, the Joint Center for Housing Studies says traditional mortgage companies are reluctant to lend in troubled neighborhoods, leaving seller-financed loans or a deed contract, the instrument of last resort.
“We find that the ratio of new mortgages to households is one of the strongest predictors of contract-to-deed activity,” the study says.
A lack of financial services in low-income communities and – increasingly – in rural communities influences the demand for non-traditional loan arrangements.
Michael Duffy, a semi-retired attorney who has handled dozens of cases involving abuse of real estate contracts, said despite the risks, deed contracts can be helpful with those responsible.
“I don’t think (deed contracts) should be illegal,” Duffy said. “They just need to be more tightly regulated. It’s kind of a Wild West there.