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.
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.
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.
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.”
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.