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How to stop predatory land contracts and rent-to-own scams: require habitability

September 19, 2017

atlanta-map NCLC Toxic Transactions

Any views or opinions represented in this blog post belong solely to the guest blog author. 

By: Sarah B. Mancini and Margot Saunders, National Consumer Law Center

The historical abuse of “contract for deed” transactions to drain communities of color of home equity is well documented. In these land contracts, the would-be homeowner pays principal and interest to the seller but does not obtain a deed to the house until the full purchase price is paid. Despite taking on the duty to make repairs (sometimes massive), pay property taxes, and insure the home, the buyer builds up no equity in the home, and enjoys none of the protections the law provides homeowners. Upon a single missed payment, the seller can exercise a “forfeiture” clause, cancel the contract, and evict the buyer.

Chart 1: Percent of Harbour Portfolio Properties in Primarily Non-White Census Blocks in Atlanta Source: Atlanta Legal Aid Society, using 2010 Census data and 2016 county property tax records. ©National Consumer Law Center, 2016.

As the National Consumer Law Center has documented, these predatory contracts are once again being used to exploit communities of color. Large financial players like Harbour Portfolio and Vision Property Management are capitalizing on the large supply of cheap foreclosed houses in many cities to hawk land contracts as a path to homeownership to unsophisticated hopeful buyers. These companies are selling properties they generally could not legally rent, because they are not in “habitable” condition, meaning they do not comply with local health and safety codes applicable to rental housing. But using land contracts, the sellers draw streams of payments from contract buyers for homes priced way above their true value because of their poor condition.

One central policy change would stop this practice in its tracks: requiring sellers of land contracts to provide and maintain habitable conditions throughout the term of the contract.

Chart 2: Percentage of Harbour Portfolio Properties in Primarily African-American Census Blocks in Atlanta Source: Atlanta Legal Aid Society, using 2010 Census data and 2016 county property tax records. ©National Consumer Law Center, 2016.

Now, land contract sellers rely on a legal fiction to avoid this obligation – the false assertion that the buyer is becoming a homeowner. If the buyer is a homeowner, then the seller is not a landlord, and is not required to abide by state laws that require landlords to maintain their properties in habitable condition. In fact, the track record of private companies using land contracts to foster homeownership is abysmal. One lawsuit against Harbour Portfolio alleges that the company filed 34 eviction lawsuits in one county (out of 85 homes purchased), and 21 lawsuits in another county (out of 42 purchased).

Indeed, rather than fostering homeownership, these investors are worse than slumlords; they squeeze rents for homes that are falling apart, and require the resident to make repairs. When the resident fails to make payments (often because they are shouldering the financial burden of installing a functioning AC or electrical system), the investor kicks them out.

The result: these properties then sit vacant and boarded up, contributing to blight. The city of Cincinnati has sued both Harbour Portfolio and Vision Property Management for code and nuisance violations on properties the investors have abandoned.

Map: Location of Harbour Portfolio Properties in Atlanta and Percent of African-American Residents by Census Block Source: Atlanta Legal Aid Society, using 2010 Census data and 2016 county property tax records. ©National Consumer Law Center, 2016.

The changes necessary to stop this abusive practice can be made through a state statute or local ordinance requiring a certificate of occupancy (or equivalent inspection by a licensed home inspector) before the execution of a land contract. Lawmakers in Ohio and Michigan are crafting laws doing just that. To be effective, a legal requirement must apply equally to rent-to-own or “lease-purchase” transactions – so that the same abuses do not crop up under a different name. The Wisconsin Attorney General is suing Vision Property Management for attempting to avoid the obligation to make repairs in its lease-purchase contracts. Many lease-purchase deals are merely disguised land contracts trying to evade state regulations.

Some affordable housing providers are currently using land contracts for good, and may be concerned about having their efforts curtailed. It’s important to remember that any entity selling homes through a land contract could instead convey a deed and take back a mortgage. The compliance issues are no different; land contracts are covered by the Truth in Lending Act and the SAFE Act’s licensing rules. The legal fees for pursuing a non-judicial foreclosure, in states that allow it, may not be much more than those for pursuing a land contract forfeiture.

But even if land contracts provide some cost savings to nonprofits, should an entity whose mission is to advance sustainable homeownership be relying on this form of contract? A would-be homeowner who is asked to take on the burden of making significant repairs and other costs of homeownership should be protected like any homeowner – with a deed. Even with a reasonable price and a low interest rate, because of the forfeiture clauses, land contracts do not provide the buyer with the same fair shot at building home equity.

People who care about low-income communities should stand together in denouncing land contracts and rent-to-own transactions for what they are: a false and elusive promise of homeownership. The best way to stop investors from abusing these contracts is to require that they bring the property into safe and habitable condition before enticing any buyer to sign up and move in.

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