Housing advocates expect more low-income Detroiters will turn to potentially risky land contracts to purchase homes as interest rates rise and systemic barriers continue to limit  mortgage lending options.

Land contract agreements allow buyers to purchase property through scheduled installments paid directly to sellers, who hold on to deeds until the full amount is paid while buyers take on the responsibility of paying property taxes and making repairs. Researchers and land contract experts say the agreements are important alternatives to homeownership for people who can’t access a mortgage, but minimal regulation and predatory sellers can cause low-income buyers to lose out hard-earned money and the property.

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The City of Detroit, University of Michigan Poverty Solutions Initiative and Enterprise Community Partners recently published a guide to help buyers stay protected when entering into a land contract. The Land Contract Buyer Guide includes key legal terms, red flag language and a checklist to complete while going through the process.

“We know enough about the predatory or bad-faith land contracts out there to know that this is an issue and that a lot of people are losing their investments,” said Evelyn Zwiebach, director with Enterprise Community Partners Inc., a national nonprofit focused on affordable housing. “They need more information available to them and more support. That’s where this guide comes in.”

Karen Ann Kling, senior strategic projects manager for UM Poverty Solutions, said it’s unclear how many land contracts are active in Detroit, and how many end in default, since they aren’t required by law to be recorded by local governments. However, she said, researchers expect land contracts are becoming more prevalent after mortgage interest rates were hiked by the Federal Reserve this year. 

David Palmer, a Detroit real estate agent and associate broker, warns that buyers should be cautious because land contracts have no state, county or local government oversight. 

“The only time I recommend a buyer utilizing a land contract as a vehicle for purchase is if a traditional mortgage is not available, and the contract is reviewed by an attorney prior to being executed,” Palmer said. “That contract needs to be closed by a title company who will properly record it with Wayne County. The recording is the only guarantee that the buyer has rights to that property and can claim a principal residence (tax) exemption.”

The Wayne County Register of Deeds shows 159 land contracts were recorded in the county since the start of the year, though the true number is likely higher. In 2021, there were 366 land contracts recorded, up slightly from the 364 recorded in 2020, but down from 550 in 2019. 

Palmer said land contracts are not the same as rent-to-own agreements. They should not contain references to tenants or landlords, but misleading language is a common pitfall he’s seen when reviewing land contracts in Detroit.

“Almost 100% of all land contract examples I’ve seen in the City of Detroit are (actually) rent-to-own agreements with a land contract cover sheet,” Palmer said. “The seller, or the lender in this case, is using what is arguably a fraudulent document to represent a contract when there’s actually a lease. The buyer typically does not have either an understanding of the process, or the right professional supporting them through the process, to know that they need to do certain things to protect their interests under that land contract agreement.”

Research on land contracts has shown the potential for buyers to be exploited. Unfair terms, inflated interest rates and hidden details in the agreements have historically led to high rates of eviction and the extraction of wealth from communities of color. But nonprofits and community development organizations in Detroit see potential for land contracts, when done correctly, to put more Detroiters on the path to homeownership. 

“There’s a racist history around land contracts, how they were used most dominantly, and it is related to redlining and lack of access to mortgage financing,” Zwiebach said. “There has been targeting of communities without access to more traditional and often safer pathways … You have to be cognizant of those risks, cognizant of that history, but also think of land contracts as one of the tools in the toolbox. We want to help increase access to safe and sustainable homeownership opportunities.”

A growing body of research shows many Detroiters lack access to capital and financing from banks, which limits wealth-building opportunities for Black Detroiters who make up more than three-quarters of the city’s population and have experienced a decline in homeownership over the last decade.

Black Detroiters are twice as likely to have their mortgage application denied compared to white residents, according to a Detroit Future City analysis. In the past five years, 45% of individuals who applied to buy homes in Detroit were denied mortgages, compared with 24% in Metro Detroit, and 21% nationally. 

Researchers said low incomes, damaged credit, and a lack of mortgage lending since the Great Recession have created more reliance on land contracts to buy homes.

“We saw heavy reliance on them in the early 20th Century, when federal regulations and racist policies from the banks like redlining excluded people from the mortgage market,” Kling said. “In the wake of the Great Recession, we again saw an uptick in the use of land contracts across the country, but particularly in Detroit, in predominantly Black and immigrant communities.”

Michele Oberholtzer Zimmerman, chief policy advisor to Detroit Mayor Mike Duggan, said landlords are more likely to sell properties through land contracts to avoid city regulations for rental properties. A large portion of the city’s rental housing is not registered with the city. Detroit Future City estimates that under 6,000 of the city’s 42,191 landlords have registered rental properties as required by law.

“As the 36th District Court is increasing its enforcement on landlords who try to bring eviction cases – (requiring) that they have a certificate of compliance – proactively, landlords are converting some of their rentals into land contracts or things that appear to be land contracts,” Oberholtzer Zimmerman said. 

What is a land contract? 

A land contract is a real estate transaction between a buyer and the property owner. Buyers agree to pay scheduled installments over a set period of time as a form of “seller financing.” Land contracts are legally binding agreements most often used by people who want to buy a home but cannot qualify for a mortgage or pay in cash. Land contracts also are used for homes that a bank might not approve a mortgage for due to low value or repair issues.

A land contract buyer is not a renter, but has partial ownership while making payments. The seller holds the deed until the property purchase is fully paid, and, during that time, the buyer has most of the other rights and responsibilities of ownership. Land contracts can be risky because buyers take on costs and responsibilities of ownership while sellers hold the deed. 

What should a land contract include?

Detroiters considering a land contract should ensure the agreement contains basic purchasing details, including an accurate legal description of the property boundaries (including the lot number, parcel ID and address), the seller’s name, the name of the buyer and confirmation that the seller will transfer ownership to the buyer once all terms of the contract are satisfied. The contract should also confirm that the seller has ownership of the property.

Land contracts should state the purchase price, down payment, monthly installment payments, late payment penalties and the contract term. Some land contracts include a balloon payment, a large extra cost that comes due the end of the contract. Clarity around balloon payments should be disclosed in the contract, though buyers should try to avoid these fees whenever possible. 

Interest rates must also be considered when looking at the total cost of the property. A $30,000 home paid for over five years at a 5% interest rate might cost $33,968 over the life of the loan. 

The land contract should list details of how a buyer can make payments to the seller, including forms of payment (e.g. check, money order, etc.), who to make the payments to and where the payments should be sent. 

Who is responsible for additional costs?

Buyers are almost always responsible for property taxes, which cover future taxes that come

due over the course of the contract and might also include unpaid taxes from previous years. Many Detroit properties have delinquent property taxes, which can lead to foreclosure if not paid.

Buyers are usually responsible for utility charges like water and electricity and also should be mindful of unpaid and past due utility bills. Buyers should put the bills that they are responsible for in their own name. Maintenance and repairs also are on the buyer, who should have an inspection performed to determine the extent and cost of necessary repairs before signing.

Most land contracts require insurance for the homes over the course of the agreement. This could either be paid for by the buyer or the seller. If the seller is using a portion of the buyer’s monthly payment toward insuring the home, the buyer should be listed on the policy along with the seller.

What to ask during land contract negotiations?

A buyer can work with a title agency or verify with the Wayne County Register of Deeds that the seller is the legitimate owner of the property and find out whether there are liens or other claims. If the seller is not the owner, they are not legally capable of passing ownership through a land contract. Buyers should ask for proof of ownership from the seller.

Delinquent property taxes can be searched through the Wayne County Treasurer. Sellers are advised to find out if there are delinquent taxes on the property, which could become a risk to the buyer and lead to foreclosure, if ignored. 

“Disclosure of back taxes is one of the key components because if you don’t know, that really puts the buyer at risk,” Zweibach said. “If the property goes into tax foreclosure, all the monthly payments they’ve made, all their investments and sweat equity is going to be lost.”

Sellers must disclose known information about lead contamination in the home, which can have serious health impacts on children. Most properties built before 1978 are assumed to contain lead paint.

For some buyers, falling behind on payments could result in sellers making the payments and then charging the buyer for them. Contract should outline if and when this can happen, and what options the seller has to get reimbursed.

Land contracts should explain circumstances that could cause buyers to default on properties. Some contracts are aggressive and can put a buyer at risk of default with a single missed payment or a lapse in home insurance. Some contracts have an “acceleration clause” that allows sellers to demand full payment of the balance on the home if buyers default on the agreement. 

A land contract should explain what type of proceedings the buyer will be subject to if they default. The contract should specify that the buyer is subject to either forfeiture or foreclosure, not automatic eviction proceedings, if they default. An agreement might also mention whether the seller can charge the buyer for costs/fees associated with bringing a legal action if the buyer defaults.

Some buyers might want to pay more than the monthly payment or pay more often to get the deed faster. Contracts sometimes include penalties for early payment, so buyers should ensure they have the option to make accelerated payments, if desired. 

Red flag language

 If a “land contract” has any of these terms, it might not be a legitimate and/or, could put the buyer in a vulnerable position:

• Tenant/Landlord: There is no tenant or landlord in a land contract agreement. There is a purchaser or buyer. If the buyer is referred to as a “tenant” or the seller is referred to as a “landlord,” that is a red flag.
• Eviction: Even if a buyer fails to honor the contract, they should not be subject to automatic eviction proceedings. Land contract buyers would first be subject to forfeiture or foreclosure. If the land contract has language implying a buyer is subject to eviction without first going through forfeiture or foreclosure, that is a red flag.
• Rent-to-own/lease-to-own: Rent-to-own or lease-to-own agreements are leases where  tenants have an option to buy the home after a certain period. During the term of the lease, they are a renter. This differs from a land contract, where the buyer has ownership interest while they are on a land contract. They do not get the “option” to buy, they are actively buying. If a land contract mentions an “option” to buy, that is a red flag.
• No ability to record: If an agreement prohibits a buyer from recording the land contract or from filing a Property Transfer Affidavit with the City Assessor, that is a red flag. Buyers should have recorded proof of their ownership interest.

After a land contract is signed

Recording the land contract with the Register of Deeds protects the buyer’s rights. It establishes, as public information, details of the contract and when it became effective. Land contracts are not required by law to be recorded, but experts say it’s essential. 

It costs $15 to record the first page of the contract and $3 for each additional page, so experts say most land contract recording costs range around $20. Other important steps include filling out property tax forms and getting on a payment plan to eliminate any delinquent taxes the buyer is responsible for.