How to cash in on a crappy home. Step one: Find a sucker to sign a land contract.

Denise Pope

Denise Pope says she’s a fighter. She needs to be after buying a home on land contract last year that led to not only a foreclosure notice for back taxes but a threatened eviction. (Bridge photo by Joel Kurth)

Denise Pope put a down payment on hope as much as a house.

Sure, the home wasn’t much: An 800-square-foot wood bungalow, barely big enough to contain her four children and husband. There were holes in the walls, probably from thieves getting to copper pipes. Like most empty Detroit homes, it lacked a furnace and water heater.

But it was in a good neighborhood, Rosedale Park, near a big playground. And the house came with a promise: Put $3,500 down, pay $500 per month plus $82 in taxes, and it would be hers in a little over two years.  

“I thought this could be our way up,” said Pope, 35, a custodian and longtime renter. “We could fix it up, put in some value, build some equity and maybe one day rent it out or have an asset to pass onto my kids.”

It didn’t work out that way. Within months after moving in last year, Pope received two legal notices. One informed her the house was in tax foreclosure over a $4,900 debt that predated her even setting foot in the home.  A few months later, she was served with eviction papers due to a rent squabble that is still playing out in the courts.

It’s a familiar story with land contracts, a form of seller financing with a deep, unsavory history in cities nationwide. They’re flourishing again as an alternative to mortgages in Rust Belt cities since lending regulations tightened after the housing collapse.

“This is becoming a big problem all over besides just Detroit ‒ like Flint, Battle Creek and other urban areas,” said Lorray Brown, co-director of the Michigan Law Poverty Program, which is helping draft legislation to regulate land contracts.

The business model for many land contracts: Buy cheap homes at tax auctions. Do no repairs. Sell for as much as 10 times the purchase price to desperate or naive buyers at high interest rates. Make the owner assume all back debt and upkeep. Evict the buyer if payments are late.

Predatory land contracts are blamed for costing generations of African-Americans their homes –  and family wealth –  in Detroit and Chicago from the 1940s to early 1970s. And activists fear history is repeating, so they’re drafting reforms in Lansing and hoping to organize buyers.

“These have been around for such a long time. We were foolish to think the practice had ended,” said Mike Gallagher, a retiree who was part of a well-known Chicago activist group that fought against contract buying in the 1960s.

He’s leading a group of activists who plan to travel to southeast Michigan this week to knock on doors of contract buyers.

Last year, land contracts outnumbered mortgages in Detroit, 834 to 710, according to Wayne County records. The land contract numbers are likely far higher than that recorded number because there’s no law that requires them to be filed with county officials.

Oakland County had about 800 land contracts last year (compared to 18,000 mortgages). Macomb County officials didn’t respond to requests for information, but in 2015 recorded about 750 (compared to 11,000 mortgages that year).

In most cases, land contracts are used legitimately when conventional mortgages are unavailable or private financing is more convenient.

But loose regulations make them an easy tool to exploit inexperienced homebuyers, experts said.

The general rule: Buyer beware. Sellers keep the deeds to homes until they’re paid in full. And in Michigan, there’s no law requiring land contract sellers to disclose debts and liens or have homes appraised before sales.

“Nobody wants to get a land contract,” said Anita Groggins, a Farmington real estate agent who has sold homes on land contracts in Detroit but says she steers them to mortgages.

“The only people who get land contracts are those who can’t qualify for mortgages.”

That’s a lot of people in Detroit, where the average credit score is 585, nearly 100 points lower than the national average. And such contracts are especially appealing because banks don’t traditionally loan money to homes worth less than $50,000, which is many homes in Detroit.

Evicted over $164

Looking around her house, Pope wonders what happened. 

Denise Pope house

A simple wooden bungalow, this house in Rosedale Park has become a money pit for Denise Pope after she bought it on a land contract last year. (Bridge photo by Joel Kurth)

Her family heard of the house from a family friend while they were renting a larger house for $750 a month. The land contract seemed like a good opportunity: Sacrifice space in exchange for a lower monthly payment and a path to homeownership.

Today, she spends most nights sleeping on the couch in the front room because there are not enough beds. The home has no stove, so she cooks on a hot plate. Nor is there a kitchen table or dining room.

But there is heat and hot water. That’s because Pope spent $3,000 on a furnace and heater after signing the contract on March 1, 2016.

Looking back, Pope said there were warning signs. When the family bought the home, a man was still sleeping in it. Turns out, he was the last contract buyer and getting evicted, Pope said. And rather than receive monthly payments by mail, an agent for the home’s seller would knock on her door every month to collect, Pope said.

Then, last summer, the tax foreclosure notice came.

“I was stunned,” said Pope. “I had a bad feeling. That’s when I knew: We’ve been bamboozled.”

Wayne County property records indicate the home has been foreclosed for nonpayment of taxes twice since 2006. It was bought at the county’s tax auction for $1,800 in 2012 by an investor who sold it the next year to International Traders LLC for $10,000, county records show.

Representatives for International Traders LLC did not return messages seeking comment. Michigan records indicate its business address is a UPS mailbox and it hasn’t filed required corporate paperwork with the state since 2012.

Representatives of a separate company that acts as a property manager for Pope’s home also did not return messages.

Homes sold laden with debt

An analysis by Bridge Magazine shows that Pope isn’t alone in buying a house that’s careening toward foreclosure.

A sample of 200 Detroit homes sold on land contracts last year showed that one in five (39 homes) went into foreclosure this year because of tax debts that are at least three years old, while another 15 are at least one year behind in taxes –  a situation that couldn’t occur with traditional bank lending that requires all liens be cleared and debts paid before ownership changes.

Nearly one in three (59) of the homes sold by land contract last year were bought out of tax foreclosure and flipped on land contracts, according to the analysis of records from Realcomp Lt., a Farmington Hills-based company that lists real estate sales.

The homes were bought for an average of $10,000 and resold for $45,000, Bridge’s analysis showed. The analysis is likely conservative, as the homes listed through Realcomp typically are far more expensive than other city land contracts and less likely to be predatory.

“These (land contracts) are sold as a way to achieve the American dream and accumulate wealth, but you’re not buying the title to the house,” said Gallagher, the land contract activist.  

“Basically, you are fixing up someone’s house for years. You can make it all the way through to the end of the contract and, if one thing goes wrong, one late payment, you end up with nothing. By and large, these deals are structured to fail.”

Pope’s contract stipulated the home was sold “as-is” and that she assumed all debts. But after the foreclosure notice, she stopped including the $82 for taxes in her monthly payment because she said it was clear the seller wasn’t paying taxes to the county, Pope said.

This February, there was a rap on the front door. It was court officers serving her with eviction. Her total delinquency: $164, according to court papers reviewed by Bridge.

“That’s when I decided to fight,” Pope said. “I’m not giving up.”

Activists were ‘ahead of their time’

Neither are Gallagher or Jack Macnamara, although both thought they’d won this battle nearly 50 years ago.

Jack Macnamara

As a young man, Jack Macnamara helped organize land contract buyers in Chicago. He thought the battle was won. Now, he’s preparing to fight it again in Detroit. 

Macnamara helped form the Chicago Buyers League in the 1960s when he moved to the Lawndale neighborhood as a young Jesuit. He met family after family in contracts that forced them to pay tens of thousands of dollars more than their homes were worth. They couldn’t get mortgages because Federal Housing Administration guidelines made them practically impossible to obtain in urban neighborhoods.

The Buyers League grew to 500 residents who picketed landowners’ homes,  lobbied City Hall and went on strike, withholding monthly payments in hopes of renegotiating land contracts.

The Chicago Tribune wrote that the strike “convulsed the city,” leading to mass evictions and showdowns with police who would drag out people’s furnishings onto the street and activists who would put them back in as soon as the authorities left.

Eventually, more than 400 contracts were renegotiated, saving an average of $13,500 per family. Data on land contracts collected by the league helped Congress pass the 1977 Community Reinvestment Act that ended federally backed redlining.

And then, the episode largely faded to history until the story was recounted in “Family Properties,” a 2009 book by Rutgers University Professor Beryl Satter (who has relocated to Detroit), and “The Case for Reparations,” a famed essay in The Atlantic in 2014 by Ta-Nehisi Coates.

“I guess we were a little ahead of our time. Detroit is similar or even worse than Illinois,” Macnamara told Bridge.

He and his group collected reams of data, which later were used by federal officials, that estimate failed land contracts cost black Chicago residents $500 million between 1940s and 1970s, about $3 billion in today’s money. Nationwide, disparities in homeownership are cited as prime factor in the wealth gap between whites and blacks. In 2013, the median wealth for white families was $141,000, compared to $11,000 for blacks and $13,700 for Hispanics.  

The contracts have become popular again after the subprime mortgage crisis, which led to the foreclosure of more than 65,000 Detroit homes. Reforms passed after the housing crash make it more difficult for the poor to get mortgages, so private lending is flourishing, Macnamara said.

“All these things –  subprime loans, land contracts –  they’re all just another way of screwing the underclass,” he said.

Gallagher and other volunteers plan to spend several days in Detroit, knocking on doors of land contract buyers. Their goal initially is to collect data and information and lay the groundwork for buyers to organize, he said.

They’ve made similar trips in recent months to Pittsburgh and two Ohio cities, Akron and Youngstown.

Legislative remedy

Efforts are underway, meanwhile, in Lansing to craft legislation to add protections to contract buyers.

The Michigan Poverty Law Program is working with Sen. Steve Bieda, D-Warren, on the legislation. Among other things, it would require the filing of land contracts with county registers of deeds (it’s now optional) and inspections before sales.

Other possible proposals include requiring third-party appraisals and forbidding sellers from passing on taxes or liens to home buyers.

Bieda told Bridge he expects to introduce legislation in the next few months. He said he hasn’t yet approached Republicans about the bills, which is typically required for passage in the GOP-dominated Legislature.

One concern is that legislative remedies could discourage legitimate land contracts and encourage “scammers to get creative and find another way around it,” said Ted Phillips, executive director of the United Community Housing Coalition.  

The Detroit nonprofit assists buyers stuck in “egregious, horrible, predatory” land contracts by buying out their contracts, Phillips said. The homeowners repay the loan through a zero percent land contract to United Community Housing Coalition.

“We are using the same tool but in the right way,” said Phillips, whose group is assisting the Chicago activists but focused now on helping homeowners facing tax foreclosure.

The Genesee County Land Bank employs a similar strategy, selling 330 tax-foreclosed homes to occupants last year to occupants through land contracts, said its executive director, Michele Wildman. The agency is amid a review of the program, though, to ensure that houses remain in good condition and buyers comply with terms of the contracts.

Another possible concern? Just about every solution to predatory lending in the past 50 years has led to more predatory lending, said Lindsay Helfman, a lecturer at the University of Michigan who is writing her dissertation at Temple University on lending in Detroit in the 1970s.

Many homes that are now being sold on land contracts, for instance, had been foreclosed on after subprime loans failed.

“The real estate market in Detroit is just broken,” Helfman said. “There’s basically a dual housing market of (mortgages and private sales). So it’s profitable to exploit people who have limited options in housing.

“This problem has always been so big that (officials) just throw their hands up and create Band-Aid programs that end up creating even more predatory lending.”

A fighter

Sitting on her couch, which doubles as her bed, Pope still allows herself to dream.

One day, she and her family will have a big backyard. Bedrooms for everyone. A spacious dining room.

Until then, she’s tethered by her land contract. Pope’s eviction case was dismissed after she produced receipts showing she made her monthly payments (minus the taxes). The foreclosure is on hold while Pope sues the contract seller in an attempt to make the company pay the back taxes, said her attorney, Joe McGuire.

Pope had hoped to pay off the home by next year, keep it as a rental property or sell it for profit and move into a bigger house. That may not happen now.

The easiest thing in the world would be to walk away. But she won’t.

“This has opened my eyes to land contracts but I’m a fighter,” Pope said.

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Comments

paul@paulbanicki.com
Thu, 05/18/2017 - 9:23am

This article gives land contracts a bad rap. The problem is not land contracts. The problem is there is very little oversight of land contracts and they can be abused. The key is for the buyer to hire a reputable attorney to guide him through the process.

The problem the author mentioned is not unlike the subprime lending that occurred in the late 90's and early 2000's. These lenders also were not properly regulated and they made a killing as the economy almost collapsed because of their shenanigans. paulbanicki.com

Barry Visel
Thu, 05/18/2017 - 11:03am

If I recall correctly, subprime lending in the '90s - '00s was encouraged by Congress to get lenders to "reinvest" in communities where they may not otherwise lend. I believe there were even lending targets to meet or otherwise suffer some regulatory pressure. My point is, the so-called mortgage meltdown was not all caused by lenders (a media perpetuated myth). Elected officials often cause as many (or more) negative consequences as positive.

David L Richards
Thu, 05/18/2017 - 10:50pm

The Community Reinvestment Act goes back to the 1970s. The problems did not occur until about 30 years later, indicating that the CRA was not the real problem. The mortgages given under the CRA performed better during the financial meltdown than did subprime mortgages given outside of the CRA. Alan Greenspan attributed the collapse of 2008 to the failure to properly value the mortgage backed obligations; in other words, treating the securities backed by subprime mortgages as though they weren't subprime. It may not have been the entire fault of lenders, but they certainly contributed to it, along with the credit reporting agencies, and the securities people who peddled what they must have known were overvalued financial products.

Rick
Sun, 05/21/2017 - 12:08pm

Thanks - for telling the truth and with facts, evidence.

Rosemarie ifill
Thu, 05/18/2017 - 3:51pm

Beautifully said!!

Eric Schertzing
Sun, 05/21/2017 - 11:21am

Saying land contract are not the problem and that the lack of consumer protections is the problem makes no sense. WHAT land contracts are is a financial product with no built in protections. The knowledge and power balance between the buyer and seller are way out of balance. Someone with the money and awareness to involve an attorney would best go with a mortgage for the lower interest rate.

Mike Heath
Mon, 05/22/2017 - 5:30am

Eric Schertzing writes, "Someone with the money and awareness to involve an attorney would best go with a mortgage for the lower interest rate."

I'm a Realtor. Demand for land contracts comes from people that don't have the credit needed to get a loan approved. The author of the article didn't address how these sorts of buyers can best protect themselves prior to closing with a land contract.

Land contracts still aren't perfect even if a buyer was savvy enough to hire a competent Realtor to help them purchase and close on the property. The biggest risk is one the author addresses. That's how easy it is for buyers to default on their land contract where the seller can then take back possession of the property and leave the buyer with nothing.

David L Richards
Thu, 05/18/2017 - 11:48am

Real problem, but I wouldn't focus on the land contract aspect. Land contracts, the same as any substantial purchase, require the purchaser to either be sophisticated about how the process works, or the hiring of a professional (a lawyer) to make sure the bad things described here do not happen. The same thing could have occurred if the buyers had paid cash and there was no land contract. When the buyers aren't careful and have little money for title insurance or lawyers, there is the potential to be cheated. But a land contract can be a valuable tool if done right, as the buyer avoids mortgage costs and qualifying for the mortgage, making it useful for low-price purchases. If the buyer doesn't know to check the back taxes and the title to the property, and cannot afford help in the process, there is a major risk.

Robyn Tonkin
Thu, 05/18/2017 - 1:09pm

I am sitting at a computer located in a house that we bought on an LC in 1980. We needed that initial 5 year LC at the time, as in order to move in a timely fashion from out West, we had to seller finance part of the price of our previous home. We didn't have the freeboard needed to buy outright at our new home area. We researched everything--we knew that all taxes were paid and that there were no mechanic's liens on the property we were buying, and since it was rural property, we insisted on a survey and a title search, even though we would not get the title right away. Folks of limited means have access to legal aid, and they need to use it when they buy a home. Home ownership is the American dream, and it is not a shameful thing, or a fact you should hide, when you don't know enough to make a home buying decision all on your own. Get knowledgeable help--not from a relative, friend, or neighbor--unless they are a real estate buying expert. Get advice on home buying from someone who knows their way around the ins and outs of the real estate game.
The people writing/contributing to this article don't know that in certain segments of the real estate market, LC's are still common, useful, and appropriate. They don't have to be recorded, so they allow for pass-through ownership on vacant property where a land speculator buys property on an LC, knowing that the title has no cloud on it, and resells rapidly, perhaps after subdivision. Like a lot of real estate instruments, the LC is fine in limited, specialized application, and for knowledgeable, prudent, and experienced buyers.

Mike Heath
Mon, 05/22/2017 - 5:34am

Hopefully you didn't merely have a title search done. But instead, the seller purchased a title insurance policy for you naming you as a beneficiary. While you aren't granted a warranty deed until you've paid off the land contract loan in full, the title insurance policy published at the closing where you pay the down payment will protect your right to quiet title and use of the property the seller is financing you to purchase from them.

I'm a Realtor who sometimes represents both sellers and buyers in land contract deals.

Rosemarie ifill
Thu, 05/18/2017 - 3:50pm

I understand what you are going through ....fight girl you fight them to the last.

Matt
Fri, 05/19/2017 - 7:59am

This article makes it sound like the land contractor is some kind of shadowy malevolent being from out in burbs taking advantage of poor black families. I suspect that in most cases this other members of the very same community taking advantage of other member's ignorance.
Maybe rather than spending its time politicking for the Democratic party the NAACP should spend its time on the nuts and bolts of real live for the people it claims to represent. But of course that's not as much fun and is much easier to judge the effectiveness of their efforts than is blaming some one else and whining for reparations.

Eric Schertzing
Sun, 05/21/2017 - 11:17am

This is a significant issue, but it is not new. The tax foreclosure process has been infested with predatory land contracts for all my years as County Treasurer. We have created two education documents for the public and housing counselors and have shared them with the other 82 counties. See www.holdontoyourhome.org for our on-line presence. Happy to work on this issue more. It matters in the City of Lansing also. schertzing@aol.com 517.303.7233

Erwin Haas
Mon, 05/22/2017 - 8:18am

LC is an excellent way to finance property exchanges; we bot our first place in 1977 using an LC so I know something.
The FHA requirements are too restrictive. Many houses fall short, and so would be abandoned so becoming community cancers. Allowing willing and informed buyers and sellers to form contracts brings these properties back into circulation.
And the cost? A trip to the title insurance agency for $2-3 00 would have clarified the botched title. A property inspection is the best investment of all and is a sine qua non before buying any property, costs $2-300.
If the numbers don't work for you, walk.

Nancy Brigham
Thu, 05/25/2017 - 7:59am

Very informative article, eye-opening. But I cringed at the big headline above a photo of Pope that by extension calls her "a sucker." That's a low blow. She has been victimized and is fighting back. She is anything but a "sucker. "
I think you owe her and your readers an apology for that.