For low-income families desperately seeking a home of their own, seller financing can seem too good to be true. A “lease to own” or a “no credit check” home loan can look like a welcome escape from rising rents and a fulfillment of the homeownership dream.
But many of these offers can be land installment contracts in thin disguise — seller-financed loans that work more like rental agreements than traditional mortgages.
Such “contracts for deed” or “installment sale agreements” can be traced to predatory lending practices dating back nearly a century, when the deals targeted African-American communities. Today, the schemes are often run by unscrupulous Wall Street investment firms that are unloading portfolios of foreclosed homes and “threatening communities of color,” as well as immigrants, according to a report issued Thursday by the nonprofit National Consumer Law Center.
Land deals ‘built to fail’
Land contracts frequently are offered to the most financially vulnerable borrowers living on limited income, the NCLC says.
“These land contracts are built to fail, as sellers make more money by finding a way to cancel the contract so as to churn many successive would-be homeowners through the property,” the new study says.
But the companies involved in these “toxic transactions,” as the law center calls them, are not the name-brand mortgage lenders most consumers would recognize.
“So they seem to be private companies, and some of them have set up a number of different LLCs and sort of shell companies that they’re using to mask how many properties they own,” Sarah Bolling Mancini, an attorney at the Boston law center and co-author of the report, told NerdWallet. “What we’re learning is that a lot of them have private-equity backing or hedge-fund backing.”
Properties pitched to first-time homebuyers
Mancini says that the homes are often marketed locally, urging potential borrowers to “become a homeowner.” For-sale signs will read, “If you want to become the owner of this house, call —.” Some homes are advertised online, particularly on listings sites such as Craigslist.
“Most people believe they are becoming a homeowner with a mortgage loan,” Mancini says. “That allure of becoming a first-time homebuyer is very powerful.”
Properties are sold in as-is condition. They often are foreclosed homes and nearly uninhabitable. It is “not uncommon to see an investor purchase a home at auction for $5,000 and sell it days later on land contract (with no repairs) for $30,000,” the study states.
Anxious buyers often fail to obtain independent appraisals of the properties, and forgo home inspections as well.
Responsibilities of homeownership without the rights and protections
The term of the loan can stretch as long as that of a conventional mortgage — 30 years — but the eviction process is not bound by the rules of a typical mortgage foreclosure. Forfeiture can come quickly, with the seller keeping all payments, evicting the buyer and quickly finding yet another hopeful homeowner.
“The contract typically has a clause in it that says that if you miss one payment, the seller can cancel the contract, or in some cases it’s called a ‘forfeiture’ instead of a foreclosure,” Mancini says. “Even though people think they’re becoming a homeowner, and they have taken on all the responsibilities of homeownership, they don’t have any of the rights and protections that go along with being a homeowner.”
With a traditional mortgage, if you can catch up on your delayed payments, you might be able to have your mortgage loan reinstated — “there’s a right to cure the default,” Mancini says. Typically, you don’t have that right in a land contract, where late payment can trigger an eviction — more like for a tenant than an owner.
Seeking a solution to ‘toxic transactions’
The abusive land installment contract offers can be found across the nation, says the NCLC, but they are most prevalent in housing markets with large supplies of low-cost homes and in areas where residents find it difficult to get a traditional mortgage.
Hard-hit cities cited in the report include Akron, Ohio; Atlanta; Detroit; and Philadelphia. The study cites 2009 Census data, the latest available, which says 3.5 million people had land installment contracts to buy a home that year. The nonprofit says the figure is likely to be much higher today.
State laws regulating land installment contracts vary widely. The NCLC is urging the Consumer Financial Protection Bureau, a government-sponsored consumer watchdog, to implement regulations for such transactions, including:
- Requiring independent inspections.
- Mandating third-party appraisals.
- Disclosing the finance charge and the annual percentage rate on land contracts.
- Providing protections for early termination.
Mancini recommends that first-time homebuyers try to qualify for a traditional mortgage loan from a bank or credit union, rather than opt for what could be a risky seller-financed offer.