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By Karen Ann Kling and Evelyn Zwiebach, with contributing authors Leonymae Aumentado and Patrick Cooney

Introduction

In the wake of the Great Recession, land contracts have reemerged in Detroit and across the country as a prominent alternative pathway to homeownership for households with limited access to capital and lending. A form of seller financing, a land contract, sometimes called a contract for deed, is a legal agreement in which a buyer purchases a home through installment payments made directly to a seller. The buyer only gains legal title to the home once they have made all payments. Much of the research on land contracts finds them to be exploitative, carrying high interest rates, yielding high rates of eviction, and extracting wealth from communities of color.

However, some mission-driven organizations in Detroit and Southeast Michigan — including nonprofits, community development organizations (CDOs), and other community development practitioners — counter that this exploitation is a function of bad-faith sellers, not land contracts in-and-of themselves. Land contracts sold by good-faith actors can provide credit-constrained buyers a viable alternative pathway to homeownership. What is more, land contracts can be structured and administered to proactively promote positive outcomes for buyers. In stark contrast with bad-faith sellers’ predatory land contracts, many mission-driven sellers structure what we term “supportive” land contracts: land contracts marked by fair sales prices, clear terms and conditions, and supports for buyers. For these sellers, land contracts function as a community development tool, helping them increase rates of homeownership for low-income households of color and promote neighborhood stability.

Drawing from an extensive literature review and qualitative data collected through interviews and survey research, this brief seeks to learn from the community development sector’s experience to identify best practices, interventions, and key common-sense reforms that would make land contracts a safer and more effective homeownership tool. In this brief, we first outline the history of land contracts, the ways they have been used exploitatively, and their current prevalence. We then explore the potential benefits of land contracts, as well as the strategies and practices mission-driven sellers use to help buyers achieve homeownership. We close by identifying policy and programmatic initiatives that state and local governments, in partnership with philanthropy and community development stakeholders, can undertake to protect buyers’ interests, prevent exploitation by bad-faith sellers, and ensure land contracts function as a viable alternative home financing tool.

Key Findings

1. Land contract reform is a racial equity issue. There is an extensive and ongoing history of sellers using land contracts to exploit and extract wealth, particularly from Black communities.
2. In Detroit, a combination of factors including low incomes, damaged credit, and a lack of mortgage lending since the Great Recession has yielded an increased reliance on land contracts as a form of home purchase financing.
3. Land contracts are not inherently predatory. Instead, they have features — including minimal regulation and loose terms and conditions — that make them ripe for abuse by bad faith sellers and for victimization of buyers.
4. Several mission-driven organizations in Detroit use land contracts to enable homeownership for credit-constrained households, administering supportive land contracts that leverage the tool’s flexibility and provide buyers leniency and assistance.
5. Efforts to reform land contracts should focus on preventing abuse, while still allowing good-faith actors to use the tool with ease and efficiency. This can be achieved by:
   • Establishing and strengthening key regulatory
     guardrails,
   • Eliminating information asymmetry between contract
     parties, and
   • Increasing legal, financial, and other supports for
     buyers and good-faith sellers.

Policy Recommendations

Based on our interviews and review of the literature, we believe land contracts can be reformed to produce successful outcomes more reliably, even when buyers are not in a supportive land contract or working with a mission-driven seller. To achieve this goal, land contract reform should focus on three key areas:

1. Establishing and strengthening key regulatory guardrails,
2. Eliminating information asymmetry between contract parties, and
3. Increasing legal, financial, and other supports for buyers and good-faith sellers.

In the full policy brief, we recommend specific policy and programmatic actions that could help achieve these reforms. Various actors and sectors would be involved in the implementation of these actions including state and local governments, nonprofits and community development practitioners, and philanthropy. If done correctly, the reforms would retain much of the flexibility and ease of use that enable land contracts to serve as a pathway to homeownership for credit-constrained households, while disincentivizing bad-faith sellers from participating in the land contract marketplace.

It is important to note that while land contracts could be regulated at the federal level, our recommendations focus on actions that could be undertaken at the state and/or local level. Additional research is needed to identify the most appropriate level of government to implement the actions. Unintended consequences and capacity for enforcement should be key factors in determining which measures should be enacted and by whom.

Download PDF of full policy brief