Installment Land Contracts:  Uses, Abuses, and Legislative Proposals

Professor Durham

Professor Freyermuth

 

 

 

 

 

 

 

 

 

Professors’ Corner

A FREE monthly webinar featuring a panel of law professors,

addressing topics of interest to practitioners of real estate and trusts/estates

Tuesday, January 9, 2018

12:30 p.m. Eastern/11:30 a.m. Central/9:30 a.m. Pacific 

Installment Land Contracts:  Uses, Abuses, and Legislative Proposals 

Speakers:

  • Professor Jim Durham, University of Dayton
  • Professor Wilson Freyermuth, University of Missouri

Moderator:

  • Professor Chris Odinet, Southern University Law Center and Visiting Professor, University of Iowa

In the wake of the mortgage crisis, several jurisdictions have seen a resurgence in the use of the installment land contract as a financing device. Use of the installment contract creates a number of risks, particularly in jurisdictions where existing precedent and/or statutory provisions do not clearly articulate the appropriate procedures for the vendor’s enforcement of contract following the vendee’s default. Some investors have sought to capitalize on this lack of clarity, effectively using installment contracts as the equivalent of “rent-to-own” contracts that provide for landlord-like default remedies while disclaiming any responsibility for the habitability of the property.

Professors Durham and Freyermuth will discuss the existing legal background governing the characterization and enforcement of installment land contracts and the wide variety of approaches taken by various states. They will also discuss the provisions and the merits of recent legislative proposals designed to regulate some of the more abusive uses of the installment land contract device.

Register for this FREE webinar program at https://ambar.org/ProfessorsCorner.

Sponsored by the ABA Real Property, Trust and Estate Law Section Legal Education and Uniform Laws Group

 

Wall Street’s New Toxic Transactions

Toxic Real Estate

The National Consumer Law Center released a report, Toxic Transactions: How Land Installment Contracts Once Again Threaten Communities of Color. It describes land installment contracts as follows:

Land contracts are marketed as an alternative path to homeownership in credit-starved communities. The homebuyers entering into these transactions are disproportionately . . . people of color and living on limited income. Many are from immigrant communities.

These land contracts are built to fail, as sellers make more money by finding a way to cancel the contract so as to churn many successive would-be homeowners through the property. Since sellers have an incentive to churn the properties, their interests are exactly opposite to those of the buyers. This is a significant difference from the mainstream home purchase market, where generally the buyer and the seller both have the incentive to see the transaction succeed.

Reliable data about the prevalence of land contract sales is not readily available. According to the U.S. Census, 3.5 million people were buying a home through a land contract in 2009, the last year for which such data is available. But this number likely understates the prevalence of land contracts, as many contract buyers do not understand the nature of their transaction sufficiently to report it.

Evidence suggests that land contracts are making a resurgence in the wake of the foreclosure crisis. An investigative report by the Star Tribune found that land contract sales in the Twin Cities had increased 50% from 2007 to 2013. Recent reports from The New York Times and Bloomberg reveal growing interest from private equity-backed investors in using land contracts to turn a profit on the glut of foreclosed homes in blighted cities around the country.

Few states have laws addressing the problems with land installment contracts, and the state laws on the books are generally insufficient to protect consumers. The Consumer Financial Protection Bureau (CFPB) has the mandate to regulate and prevent unfair and deceptive practices in the consumer mortgage marketplace, but has not yet used this authority to address the problems with land installment contracts. (1-2, footnotes omitted)

This report shines light on this disturbing development in the housing market and describes the history of predatory land contracts in communities of color since the 1930s. It also shows how their use was abetted by credit discrimination: communities of color were redlined by mainstream lenders who were following policies set by the Federal Housing Administration and other government agencies.

The report describes how these contracts give the illusion of home ownership:

  • They are structured to fail so that the seller can resell the property to another unsuspecting buyer.
  • They shift the burden of major repairs to the buyer, without exposing the seller to claims that the homes breach the warranty of habitability that a landlord could face from a tenant.
  • They often have purchase prices that are far in excess of comparable properties on the regular home purchase market, a fact that is often masked by the way that land contract payments are structured.
  • The properties often have title problems, like unsatisfied mortgages, that would not have passed muster in a traditional sale of a house.
  • They often are structured to avoid consumer protection statutes that had been enacted in response to previous problems with land contracts.

The report identifies Wall Street firms, like Apollo Global Management, that are funding these businesses. It also proposes a variety of regulatory fixes, not least of which is to have the CFPB take an active role in this shadowy corner of the housing market.

This is all to the good, but I really have to wonder if we are stuck just treating the symptoms of income and wealth inequality. Just as it is hard to imagine how we could regulate ourselves out of the problems faced by tenants that were described in Matthew Desmond’s Evicted, it is hard to imagine that we can easily rid low-income communities of bottom feeders who prey on dreams of homeownership with one scheme or another. It is good, of course, that the National Consumer Law Center is working on this issue, but perhaps we all need to reach for bigger solutions at the same time that we try to stamp out this type of abusive behavior.