An exploration of the most commonplace predatory lending scams destroying the futures of poor and minority Americans with impunity.
Part 4: “The Poor Man’s Mortgage” – The Brilliant Cruelty of Contract and Rent-to-Own Home Sales
The most important financial decision a person can make, nearly all research shows, is buying a home. For a wide variety of reasons, homeownership is the foundation to financial stability and the creation of wealth—especially generational wealth. Tragically, for a large swath of Americans—namely poor and minority communities—the option of becoming a homebuyer seems like little more than a pipe dream. It feels unrealistic and unattainable. But we dream of it anyway, hoping beyond hope that someday maybe we will get lucky.
There are, of course, numerous benefits to owning a home. The sense of pride you feel knowing that your home belongs to you. The sense of community that comes with being a rooted, permanent fixture of your neighborhood. The peace of mind that comes with knowing that because you own your home, your hard-earned money is going toward paying down a mortgage instead of evaporating into thin air when you’re paying rent. You are building equity with each payment. With each payment you’re another step closer to owning the home free and clear. The home’s value, usually, continues to go up, while the money you owe continues to decline. And there is also the surprisingly massive bump in credit scoring and the world of fairer lending opportunities that miraculously emerge before you. The list of benefits is endless. But it is the generational wealth aspect and the idea of homeownership being the very cornerstone of the American Dream that are what makes homeownership the number one life goal of the vast majority of Americans.
Of course, where there are dreams, there are people looking to exploit them. And what better way to exploit someone than to prey on the most important and deep-seated of all American Dreams? That, too, is the American way.
For those of us who are unfortunate enough to have bad credit or the wrong color of skin, the world of conventional mortgages is often not an option. If we are lucky enough to get approval for a conventional mortgage, odds are that we will be given higher rates and more unfavorable terms than our wealthier and whiter counterparts. This is despite the fact that many government agencies and regulations have been created to address these disparities since the end of WWII. Americans of color and low incomes are simply being kept out of the homeownership class in ever-changing ways.
And if you are lucky enough to become a homeowner through conventional means, people of color and the poorest among us are often taxed at roughly 50% higher than their wealthier counterparts in the same cities and towns.
Yes, the system really does appear to be stacked against us.
The most desperate and brave among us, however, might be tempted to take a stab at homeownership through a different route: “The poor man’s mortgage.”
Perhaps you’ve heard of buying a home on contract, or perhaps you’ve seen signs in your community for homes with “No Money Down!” or “Rent To Own!” These are the two most common predatory methods employed by contract home sellers who are profiting off the most desperate among us. And these are the two methods of home buying to avoid at all costs. Much like payday loans and predatory subprime auto lending, these scams are designed to be deceitful and to wring every penny possible out of your bank account. They sound too good to be true, because they almost always are.
There are rules in place, established by the Department of Housing and Urban Development (HUD), that are designed to make contract home sales and documents more transparent. Unfortunately, it is far too easy to bypass these regulations by doing what predatory home sellers do best: simply ignore the requirements or bury the mandatory legal language somewhere in the contract where the buyer can’t or won’t understand the reality of the contract into which they are entering.
In recent years, there has been a wave of backlash against this particular form of predatory lending, but the results have been less than favorable to would-be contract homebuyers because of the nature of this type of transaction. Frankly, oversight of an agreement between two individual parties, as opposed to between a person and a bank, is more difficult to achieve than it seems.
However, never before has homeownership been more essential than now, with fewer homes for sale than in recent decades and home prices skyrocketing due to the lack of supply to meet the current demand. Couple this with the fact that corporate landlords who already were abusive in their eviction practices are now using Covid-19 as an excuse to evict with impunity, and a home to call one’s own is even that much more important. To be a renter is to have no safety net, financially or physically. So the predatory home selling sharks are circling the poor like never before. Our flesh is their chum in the water, and all the sharks want a piece. Avoid them at all costs.
These are the two most common ploys used to suck you in.
(For a more thorough breakdown on the differences between these two types of contract sales, please read this report.)
Contract Home Sales
Contract home sales, also known as “contract for deed” and “land contract sales,” are supposed to mimic the way traditional mortgages work, in theory and in law, in terms of many of the protections buyers are supposed to be afforded. However, these are often far less formal agreements, which don’t require the due diligence that banks are legally bound to do when originating a home loan. Banks must do title searches to determine the true owner of the property, identify any outstanding liens or claims to the property, as well as collect specific housing and loan data to report to the federal government.
Contract home sellers are often able to simply come to an agreement with the buyer on a price, and then “finance” the loan themselves by having the buyer pay the down payment and monthly installments (which include interest and principal) to them directly. The seller sets the terms of the loan regarding contract length and interest, and both parties enter into the agreement as though it were a regular loan.
But that is largely where the similarities end.
In reality, what makes these types of loan agreements so dangerous are the same things that make subprime auto loans dangerous—but with much more at stake financially.
Like subprime auto lenders who employ the “churn and burn” method, so, too, do many contract sellers evict the buyer from their property and the contract becomes void if the borrower becomes delinquent on payments. Any money the buyer paid toward the loan is forfeited. Unlike conventional mortgages, for which there is an entire foreclosure process that protects borrowers, contract sales do not provide these guarantees, and the results can be devastating. Borrowers do not get to keep the equity in their homes for any amount paid. Borrowers cannot fight the process of losing the home, and any money put into it in repairs or upgrades is lost because it is not their property until the loan is paid in full.
Also, twenty or thirty years (as most contract loans are) is a long time to never miss a single payment. Life rarely is so consistent or kind financially to the poorest among us. And that is exactly what the contract seller is counting on. Like payday loans, and like subprime car loans, contract home loans are designed for you to fail so that all the money paid reverts to the seller and you are left with nothing.
In other words, if you ever fail to meet any of the payments—and many contract sellers do void the loan after the buyer is late on even a single payment—all that money was spent for nothing and goes into the seller’s pocket. He is free to simply “churn” the house and sell it again, duping another unwitting buyer into getting locked into the same shady process.
But there are even more dangers lurking in the contract home sale that buyers need to be aware of before initiating a purchase of this sort. Among other things, oftentimes the seller misrepresents the conditions of the home and—like used car sales—often sells the home “as is.” This means the buyer is on the hook for any costly home repairs or upgrades necessary to get the home up to code, or else you can be fined by the city and could potentially lose your home if they decide to condemn it. And, again, any money you spend doing that—if you even have that money to spend—is forfeited if you default on the contract by missing payments.
Furthermore, sellers purposely give themselves virtually no risk in the process. If you repair the home and default, not only did you save them money, but now they can charge more for the home the next time they sell it because it is in better condition. The seller is not required to make the repairs (as they would be if the home mortgage were backed by an FHA loan, for example), especially when you agree to buy it “as is.”
In short, though this might seem an appealing option because there are no credit checks and you can bypass a bank altogether, be very cautious when considering this option. Read the resources at the end of this post to better educate yourself about the potential pitfalls of a contract home sale.
Rent-to-Own Home Sales
The Rent-to-Own sale is slightly different than the Contract Sale, and has its own potential pitfalls that must be avoided. On the positive side, most of the time the potential buyer leases the home the same way you would on a rental contract, but with the option to buy the home at an agreed-upon price at a later date (also decided between the landlord/seller and the renter/buyer).
Another benefit is that, at least in theory, your home price is locked in at the agreed amount, as long as it is in writing, and as long as you abide by the terms of the rental agreement.
However, as is often the case with predatory schemes, the downsides far outweigh the upsides. The biggest among these is that often would-be buyers agree informally (not in writing) to a price and a date, and this is very rarely considered to be legally binding in the courts.
But, even if you do get the agreement in writing, failure to make on-time rental payments, or failure to obtain funding to purchase the home by the agreed-upon date means that you forfeit any money you paid in rent, as well as any money you put into repairs or upgrades on the property.
Many rent-to-own sellers often refuse to do repairs to the home while you are renting—as they are required to do by law if you have a standard rental agreement—citing the fact that you are in the process of buying the home and therefore are responsible for maintenance and repairs. This, technically, is not true, but most buyers aren’t aware of the reality of landlords’ responsibilities in this sort of circumstance.
Sometimes sellers will finance the home for you at the agreed upon date, as in the manner in which contract home sales are conducted, but often they expect you to get third-party financing from a bank or credit union, knowing that you likely won’t be able to or you wouldn’t be renting-to-own in the first place.
And finally, there is the fact that since you are not legally purchasing the home while you are leasing it, the seller is technically able to—for example—use the property as collateral against other loans for himself. That means that if there is a lien against the property at the time you attempt to purchase it, you will be unable to buy the home because someone else has dibs on it.
The Big Pushback
Though there have been ways in which poor and minority citizens have fought back against these types of predatory tactics, many of these same techniques persist to this day. In the wake of WWII, when Black homebuyers in Chicago were largely forced to buy homes on contract if they wanted to become homeowners, the Contract Buyers League was formed, which helped hundreds of Black families renegotiate their contract terms and stay in their homes. But this was not without physical, emotional, and financial sacrifices. Chicago police regular beat and harassed these homeowners when the sellers moved to evict them.
After decades of deregulation of the industry in the ‘70s and ‘80s, HUD and FHA and other organizations began to attempt to regulate the industry, but it had little effect. Throughout the ‘90s and ‘00s, corporate conglomerations bought up cheap, often-dilapidated, foreclosed homes from government agencies like Fannie Mae, then turned around and sold them to poor and minority homebuyers on contract. This kicked off a modern-day free-for-all of predatory home sales that persists to this very day.
Luckily, states like Illinois, who in 2018 passed a law to protect contract homebuyers, have begun to push back in more meaningful ways. But the protections are still rather limited, if the seller is truly unscrupulous and wants to take advantage of an underserved community’s desperation. It is a step in the right direction though, and other states are flirting with the possibility of similar laws. But the dangers of these schemes are still very real, and buyers should be extremely cautious and critical if considering these home-buying options.
The Ray of Hope
Thankfully, there are realistic alternatives to these two treacherous forms of home buying. Chief among these is the initiative we here at AHP 75 have begun in an effort to address the very predatory lending schemes outlined in this four-part series. We have a suite of services designed to help would-be homebuyers fight illegal and/or unmanageable debt to get your credit remediated in order to qualify for a legitimate mortgage. We have Advocate Attorneys who specialize in litigation of bad and unethical lending and credit reporting. We have AHP Mortgage Direct, which, unlike other major lenders, is willing and able to finance micro mortgages as little as $5,000 and up to $100,000. The cheaper properties other lenders won’t bother financing? That is our wheelhouse.
For a more thorough explanation of the micro mortgage process, alongside a discussion with AHP 75 founder Jorge Newbery, read this post. There we break down the entire process of applying for a micro mortgage through AHP 75, as well as answer many of the pressing questions potential homebuyers often ask. We are committed to raising the homeownership rates of all Americans to 75%. And we are committed to doing it effectively and ethically.
Protect Yourself. Know Your Rights. Recommended further reading:
HUD: “Instructions for Sales Contract”
Difference Between Contract Sale & Rent-to-Own of a House
National Consumer Law Center: “Toxic Transactions: How Land Installment Contracts Once Again Threaten Communities of Color”
“Law Center Calls Seller-Financed Home Sales ‘Toxic Transactions’”
Homeownership Without a Net
Wikipedia: Contract Buyers League
“How We Indentified Lending Disparities in Federal Mortgage Data”
“The Infamous Practice of Contract Selling Is Back in Chicago”
“Law Protecting Rent-to-Own Buyers in Illinois Goes Into Effect”
“Homeowners in Richer Neighborhoods Are Being Taxed at Roughly Half the Rate of Homeowners in Lower-Income Neighborhoods”
“Vision, Operator of Rent-to-Own Homes, Gets Legislative Scrutiny”
“Old Mortgage Alternative Makes a Controversial Resurgence”
“Why a Housing Scheme Founded in Racism Is Making a Resurgence Today”
“Predatory ‘Home Sales Contracts” Cost Black Chicagoans Billions”
Caught in a downward spiral of debt? Visit AHP75.com to learn about our Debt Remediation Services.
Aaron Morales is the Social Justice Writer for AHP 75, based out of Chicago, IL.