In proclaiming June National Homeownership Month, President Joe Biden urged the country to “recognize the enduring value of homeownership and to recommit ourselves to helping more Americans realize that dream.”
For too many, and particularly Black households, the dream of homeownership remains out of reach. In housing markets like Detroit’s, scarcity of credit means prospective buyers unable to obtain mortgages must turn to cash sales or land contracts, a seller-financing tool that is notorious for predatory practices and often fails to deliver on the central promises of homeownership: housing stability and wealth building.
Throughout much of the 20th century, predatory land contracts were used primarily in Black communities, in part because federal regulations and mortgage lenders often excluded people of color from traditional lending opportunities. Since the Great Recession, there has been an increased reliance on land contracts in Detroit and across the country due to damaged credit, lack of mortgage lending, low incomes, and other factors. Thoughdata on the prevalence of land contracts is incomplete, Detroit saw more land contracts than home mortgages in 2016: 2,177 compared to 2,023. Land contracts have also been a favorite tool of investment-backed portfolio investors, who for years have purchased properties in bulk from the Wayne County tax foreclosure auction, sold the homes on predatory terms, and evicted occupants in large numbers. Between 2005 and 2015, some of Detroit’s most egregious contract sellers had filed even more evictions than properties they owned.
Though the notoriety of land contracts is well-deserved, they are not inherently predatory. Many community development organizations and other mission-driven actors identify land contracts as a critical tool for making homeownership accessible to lower-income, credit-constrained households and for stabilizing communities.
As part of a new policy brief, “In Good Faith: Reimagining the Use of Land Contracts,” Poverty Solutions at the University of Michigan and Enterprise Community Partners interviewed community development organizations, nonprofits and other mission-driven organizations that are rewriting the narrative around land contracts. In stark contrast with bad-faith sellers’ predatory approach, these mission-driven sellers create supportive land contracts with fair sales prices, clear terms and conditions, and support for buyers. Buyer success is the guiding goal, and transparency, relationship building, and strong communication are hallmarks.
By learning from the supportive land contracts and best practices used by mission-driven organizations, we can make land contracts a safer and more effective pathway to homeownership in Detroit. State and local governments, in partnership with philanthropy and community development, should implement common-sense policy reforms and programmatic initiatives to prevent exploitation by bad-faith actors and ensure land contracts function as a viable home financing tool. Intervention is especially urgent now during recovery from the COVID-19 economic downturn, since land contract buyers have been shut out of federal pandemic relief programs.
Action should focus on three key areas:
- Establishing and strengthening existing regulatory guardrails: Requiring the recording of land contracts and implementing eviction protections would create a solid foundation for fair outcomes for buyers.
- Eliminating information imbalances between contract parties: Buyers often get in trouble when they purchase homes with hidden costs, such as back-taxes or significant repair needs. By requiring clear contract terms and an independent inspection prior to purchase, we can begin to right this imbalance.
- Increasing legal, financial, and other support for buyers and good-faith sellers: Providing buyers access to no- or low-cost legal services and creating a best practices guide for land contracts would ensure buyers and sellers are better equipped to engage in the land contract process.
As Detroit works to better support those whose dreams include homeownership, we cannot overlook the critical importance of land contracts — both because of the serious risks they can present and also because of their potential to make that dream a reality.
Karen Ann Kling is a strategic projects manager for Poverty Solutions at the University of Michigan and a former affordable housing economic policy fellow for the City of Detroit. Evelyn Zwiebach is senior program director for state and local policy with Enterprise Community Partners, Inc. in Detroit.
“In Good Faith: Reimagining the Use of Land Contracts,” is available on Enterprise’s and Poverty Solutions’ websites.