The infamous practice of contract selling is back in Chicago

August 7, 2017 11:22 AM

50 years ago, when African-Americans on Chicago's South and West sides weren't able to get mortgages due to redlining, a predatory practice called contract selling sprung up. Later, during the sub-prime heyday, these neighborhoods were targeted with sub-prime mortgages. Now, after credit tightening due to the mortgage crisis in 2008, contract selling has returned and continues to prey on disadvantaged neighborhoods.

Contract selling, also called "contract-for-deed," "agreements for deed" or "land installment contracts," are often pitched to low-information buyers in a way that makes them sound like a mortgage. But contract buyers do not earn any equity in the house--yet remain on the hook for repairs, property taxes, and homeowners insurance. The deed is only turned over to the contract buyer at the end of their contract, and if they miss payments they can be evicted, similar to a renter, without any of the regulatory protections mortgage-holders enjoy. Companies backed with millions of investment dollars buy up dilapidated homes on the cheap and turn around and contract-sell them to unsuspecting residents at huge markups, while requiring the contract buyer to do the needed renovations on top of making their monthly payments.

Take Smith's house, for example. Had she worked with a real estate agent, as most traditional home buyers do, she might have learned that Harbour bought the home from Fannie Mae in 2011 for just $519. But Smith didn't know this when she signed a contract in December 2011 promising to pay Harbour $34,025 for the house. Nor did she realize—though the details were given in her multipage contract—that at the 10 percent interest rate charged by Harbour, she would pay a total of $107,492.40 for the house over the course of 30 years—if she didn't default before then.

Meanwhile, the Trump administration wants to curb the Consumer Financial Protection Bureau's powers (if not eliminate it entirely).

Republicans hope to oust the agency's current head, Obama appointee Richard Cordray, and replace him with someone the current president deems more business friendly. Reportedly on the short list is Brian Brooks, a former vice chairman and chief legal officer for OneWest, a bank accused of widespread foreclosure abuses. Even short of shutting down the consumer agency, as Ted Cruz hopes to do, another bill recently introduced by Republican lawmakers would hand control of its budget from the Federal Reserve to Congress, allowing lawmakers to dramatically limit its size and scope.

posted by misskaz (6 comments total)

man, so much of this country has a penchant for screwing the poor and disenfranchised as hard as they can.
posted by drewbage1847 at 12:34 PM on August 7, 2017 [6 favorites]

Beyond the IL law treating deed-contract buyers like homeowners for foreclosure purposes, limiting liquidated damages (seller keeping payments after breach) would simulate equity and eliminate a lot of risk to the buyer above what a mortgage imposes.

Can anyone comment on the true cost/difficulty of buying a home from Fannie? If $500 is normal, then why can't a non-profit scoop them up for $1,000 and sell them for $2,000? Or better yet, charge a cost-covering fee to help people buy their own home for $500?
posted by michaelh at 1:13 PM on August 7, 2017 [4 favorites]

I wondered that too, michaelh, but the article mentioned these companies buy up the distressed homes in a big bulk lot - so maybe it's possible that $500 price tag wouldn't have been available to a single individual buying a single house? Like, it's 1. not on the market in any real to-the-public sense and 2. part of a lot and not to be sold individually.

Because otherwise, yeah, the woman in the article could have bought the house outright for less than the "down payment" she made on the deed contract. Still would have been on the hook for all the repairs it needed but at least she wouldn't also be out that monthly payment.
posted by misskaz at 2:12 PM on August 7, 2017 [2 favorites]

I have a young adult friend who wants to live in Detroit. I was helping her look for houses and found a ton of these kinds of terrible contract deals being advertised, really bad. Not posting URLS because I didn't save them and don't want to boost them anyways.

But I kept looking and eventually found this:

http://www.buildingdetroit.org/

Seems to be a legit organization and you can get a house through them. They have some that are extreme fixer uppers, and some that are fixed already. The extreme fixer-uppers, well, they seem to be trying to keep them from going to speculators, at least. But I think that if you didn't have deep pockets, the fixer-uppers are a bad choice. They require so many things done in such short time frame, someone who expects to DIY and build sweat equity could end up pouring in money and then losing the house when they run out of time. The ones that are fixed already seem like a better deal, though while they are pretty inexpensive they are still costly enough to be out of reach for people who cannot get conventional mortgages.
posted by elizilla at 8:41 AM on August 8, 2017 [3 favorites]

I saw while looking at the houses elizilla posted when you buy one of their famous $1000 houses, you become responsible for all the past due taxes, water bills and even liens on the property from past owners. That's probably more than most buyers could risk.
posted by sweltering at 3:20 PM on August 11, 2017 [1 favorite]

elizilla I agree that the rehabbed houses seem like a really good deal. As somebody living in a Big City on the East Coast, they're well under what I expect to pay for a downpayment. Maybe I should move back!
posted by sweltering at 3:22 PM on August 11, 2017