Academic journal article Notre Dame Law Review

The Current Predatory Nature of Land Contracts and How to Implement Reforms

Academic journal article Notre Dame Law Review

The Current Predatory Nature of Land Contracts and How to Implement Reforms

Article excerpt

INTRODUCTION

When James R. Williams bought a home in Cincinnati from Harbour Portfolio Advisors using a land contract, he "thought he had found a great deal on a home." (1) His monthly payments to Harbour were lower than his previous rent payments, and the money would go towards the $40,000 purchase price of the home. (2) At the end of the thirty-year contract period, Mr. Williams would own the home. (3) Unfortunately, he soon discovered that he faced "around $10,000 in critical repairs to the plumbing system" and his grandson suffered lead poisoning. (4) Instead of being a great deal, the home turned out to be a "money trap[ ]." (5) Mr. Williams's situation is not uncommon. (6) Unlike a traditional bank-financed mortgage, land contracts are directly financed by the seller, and thus give low-income individuals who would not qualify for a bank-financed mortgage a chance to own their ownhome. However, land contracts often come with unexpected and hidden costs for buyers. (7) In many states, land-contract buyers end up spending thousands on basic repairs to make their homes habitable. (8) What a buyer originally saw as a great deal becomes a toxic transaction. (9)

A land contract, also known as an "installment land contract" or "contract for deed," is a "contract for the purchase and sale of real estate under which the purchaser acquires the immediate right to possession of the real estate and the vendor defers delivery of a deed until a later time to secure all or part of the purchase price." (10) Unlike traditional bank-financed mortgages, the seller and the buyer contract together directly, and the seller retains legal title until the buyer has paid in full. (11) While the structure of land contracts varies by state, normally the buyer pays the seller an initial down payment and then makes monthly payments toward the purchase price plus interest for the duration of the contract term. (12)

A land contract typically favors the seller at the expense of the buyer. Like a traditional homeowner, the buyer must pay for property repairs, taxes, and insurance. (13) Yet foreclosure laws typically do not protect contract buyers and, if they miss a payment, they can be forced out of their home, losing any equity they had built up in the property. (14) As one real estate investor described it, in land contracts buyers "have all the responsibilities of a homeowner but none of the rights." (15)

Because land contracts tend to favor sellers, buyers must protect themselves. Many buyers, however, lack the information needed to make responsible decisions. (16) Buyers often enter into land contracts without getting an independent inspection (17) and appraisal (18) of the property. As a result, buyers are often unaware of the true costs of the property they are purchasing. Contract buyers tend to be low-income individuals with less education and often are confused about the terms of the contract itself. (19) Their lack of information makes it difficult for buyers to protect themselves against unscrupulous sellers and is one of the reasons why some advocates consider land contracts predatory. (20)

Because land contracts are frequently inequitable, advocates and legislators have called for enhanced regulation. (21) This Note examines the imbalance of power between sellers and buyers during the formation of land contracts, the ways the law has attempted to lessen the inequality, and how to implement potential reforms. Part II discusses the history of land contracts and their recent resurgence since the 2008 housing crash. Part III explains that while current land contracts are often predatory, land contracts could potentially be a useful way for low-income individuals to become homeowners. Part IV outlines proposed national and state reforms. Part V makes recommendation for future reform and discusses potential obstacles to the implementation of two of the most promising reforms: mandatory independent inspections and mandatory independent appraisals. …

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