Land contracts surge in Detroit; group calls for reform

Joel Kurth
The Detroit News

A national nonprofit is calling for sweeping reforms to land contracts, saying the alternative home financing is victimizing communities with people of color such as Detroit.

Citing a February article in The Detroit News, the Boston-based National Consumer Law Center issued a report on Thursday that deemed land contracts “toxic transactions.”

Also known as contracts for deeds, land contracts are alternatives to mortgages. Buyers make payments directly to sellers and often have no ownership stake until the entire debt is paid. The contracts are common in communities where credit is a challenge and home values are too low for bank financing. Last year, they outnumbered traditional mortgages in Detroit: 2,177 to 2,023, The News reported.

Loosely regulated, land contracts offer the “illusion of home ownership” but are often “written to fail,” shifting repairs and tax debts onto unsuspecting buyers, according to the report from the nonprofit that advocates on consumer issues for poor people.

“It is the same communities that bore the brunt of the foreclosure crisis and economic meltdown that are now seeing a rise in land contracts,” the report reads.

“As with earlier forms of predatory lending, contract sellers target low-income buyers with limited resources who do not qualify for conventional mortgages. Immigrants and limited English proficient populations are especially at risk for this type of financing as they search for affordable housing without access to conventional financing.”

Land contracts were popular — and controversial — from the 1930s to 1960s, when federal loan guidelines and banks made it difficult for many blacks to qualify for mortgages.

Since the mortgage meltdown of the late 2000s, they’re back big-time, the report found.

The Detroit numbers likely are an underestimate and current national numbers aren’t available. That’s because the law doesn’t require sellers to file the contracts with government agencies such as registers of deeds. The News’ report found the contracts were adding to evictions in Detroit, which leads the nation in them.

The Consumer Law Center report calls for several nationwide reforms, including requiring inspections, third-party appraisals and payment of back taxes before sales; clear language in contracts; beefed-up enforcement; and annual statements showing balances, among other things.

Detroit housing advocate Ted Phillips was interviewed for the report. He said he’s not aware of any legislative effort in Michigan on land contracts.

He said not all land contracts are “evil” and they can be useful if properly written. In Detroit, though, they often involve homes bought by land speculators from tax foreclosure auctions that cause problems, he said.

“Certainly, there’s a racial impact. You see it more in Detroit, Highland Park, Inkster and Ecorse,” said Phillips, director of United Community Housing Coalition, a nonprofit that provides housing assistance to low-income residents.

Twitter: @joeltkurth