Poorly regulated land contracts have often been used by bad-faith home sellers to swindle low-income Detroit residents out of money and property. But some nonprofits and academics are looking to rehabilitate the practice as an alternative path to homeownership.
Land contracts are used most frequently when a buyer can’t secure a traditional mortgage. Under these arrangements, a seller accepts regular payments directly from the buyer, usually while the latter lives in the property. (Land contracts are similar to rent-to-own agreements.) After the house is fully paid off, often on a faster time-frame than a 15- or 30-year mortgage, the buyer gets the property.
But because they’re often made with poorer buyers and are subject to less oversight, land contracts are ripe for exploitation. Sellers will often hide details of an agreement, like a balloon payment, in fine print. Interest rates are sometimes set to an illegally high amount. Some contracts give almost no leniency to buyers, who aren’t offered the same legal protections as renters; if they’re one day late on one payment, that can mean the cancellation of the contract and forfeiture of the property and all money invested up to that point.
Land contracts made a comeback nationwide in the wake of the mortgage crisis after first coming into widespread use in the mid-1900s as a predatory lending practice targeting Black homebuyers shut out of the traditional market. In Detroit, they’ve frequently been the favored sales method for ethically dubious speculators looking to make an easy buck. In some instances, these sellers have collected payments while failing to pay property taxes or counted on payment struggles that fuel a cycle of repossessing properties and signing up new “buyers.”
But nonprofit housing agencies and some good-faith sellers haven’t given up on land contracts — in many cases they’re still considered the best alternative when selling to a buyer who can’t access a mortgage and doesn’t have much cash.
A recently released academic brief from the University of Michigan Poverty Solutions initiative and Enterprise Community Partners, “In Good Faith: Reimagining the Use of Land Contracts,” took a closer look at the practice and the organizations that do them well. We spoke with the paper’s authors, Karen Ann Kling, strategic projects manager for Poverty Solutions, and Evelyn Zwiebach, state and local policy director for Enterprise Community Partners, to learn more about their findings, best practices for people looking to enter into land contracts and potential policy fixes that could make them more secure.
Note: This interview has been edited for clarity and length.
Detour: Why did you decide to write this brief?
Karen Ann Kling: Evelyn and I both knew about land contracts and their history of predatory use in Detroit and across the country. But we also heard a different narrative from trusted members of community development sectors about how land contracts were not inherently predatory and that they were using them to enable homeownership. We were interested in that story, especially because we found that their side was really underrepresented in the literature and news on this topic. So we decided to explore it further and gain a better understanding about what could be done in policy and programs to prevent predatory contacts and increase their support in Detroit.
What about land contracts make them so easy to exploit?
Evelyn Zwiebach: It’s a combination of factors. One of the things that we highlight in the brief is that there isn’t much regulation around land contracts. The concept of freedom of contract was baked into their use from the outset, and there has never been federal regulation or oversight like there is for the mortgage market. So there’s a patchwork of regulations at the state and local levels, and those gaps can be difficult to enforce or for courts to even understand where the law stands. That’s something we’ve seen play out in Michigan and other states.
How common is the practice of predatory land contracts?
Zwiebach: We don’t have the full picture. This ties into one of the key recommendations that we made. Right now in Michigan, there is no requirement that land contracts be recorded. So we do not have a full record of the land contracts that have existed. Some are recorded, and sometimes buyers or sellers will file what’s called a memorandum of land contract, but that’s just a very limited picture. What we do know is that they are prevalent — the number of reported land contracts is a tiny fraction of what probably exists. Moreover, a national study of more than 400,000 land contracts found that around 25% were in Michigan. Another study found that between 1950 and 1970, land contract sales expropriated between $3.2 billion and $4 billion. That’s a tremendous amount of exploitation. This is something that we can’t continue to overlook; we need to pay attention to this tool because it’s being used widely in our communities. And in many cases, it’s not being used in good faith.
Kling: We know that in Detroit, a combination of factors — lower incomes, damaged credit and a lack of mortgage lending — has made it hard for people to purchase homes. And they turn to land contracts as one of their few alternatives. We know that despite the dark history that tends to cloud how we understand land contracts, people are still using them. Therefore it’s even more important that we focus on creating regulations that prevent the predatory use we’ve seen in the past and also supports good-faith sellers.
What are your recommendations to buyers or sellers who want to enter into a successful — and fair — land contract?
Kling: The number one thing we’ve been hearing is the importance of communication with buyers. People who enter into this agreement need to think of it as a partnership. That means offering leniency and support if they’re struggling to make payments instead of immediately exercising the forfeiture clause. Another key principal is making the land contract clear and consistent — make the terms easy to understand. For example, with payment terms, be transparent about the payment structure, even providing an amortization table describing what they pay each month and what portion is going to principal and interest. Then, if there’s a balloon payment, make sure the person knows what is coming and what that means.
Zwiebach: And if you’re a mission-driven organization, bringing grant dollars to support buyers who might have an unexpected financial hardship is crucial.
What about legislatively? Are there things that should be codified to make them more secure for buyers?
Kling: There are a number of things that can be done. We have our recommendations under three categories. One is strengthening existing regulatory guardrails. An easy fix would be requiring that all land contracts be recorded with the county within 30 days of signing. A buyer can’t easily sue for breach of contract if they can’t prove an agreement was ever signed in the first place. It would also go a long way towards collecting more information about land contracts. It’s frustrating that so much is unknown and we can’t say with much certainty, or even estimate, how many land contracts have been initiated in Detroit. In order for us to really understand the problem and target our solutions, it would be important to know how many land contracts there are, who’s selling and the terms they’re agreeing to. Another category of recommendations is solving the information imbalance. Buyers get into trouble when purchasing homes that have a number of unknowns like hidden costs for home repairs, back taxes and existing liens. In Michigan, we could require an inspection to be carried out before a land contract gets signed, so the person knows exactly what repairs are required. It would also be a great idea if the seller had to provide title insurance as well.
Zwiebach: Legislative reform is absolutely needed, but there are things that can be done in the meantime. Programmatic initiatives we can launch as both an interim measure and also to pilot things, to start going after some of that low-hanging fruit while advocating for legal changes. There’s already a great opportunity there; the research has been very well received with interest from a lot of folks to reform land contracts and make them work more effectively. But even before that, we can increase access to education and best practices, offer better financial and legal support. All of that would make a big difference.