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A contract is shorthand for “contract for deed,” also advertised as “rent to buy,” “seller financing,” or “installment land contracts.” These are not inherently predatory, as any northern Midwesterner will tell you. Land contracts are common ways to finance real estate, especially in rural areas without many banks.
In 2009, the last year such data was collected, the U.S. census reported that about 3.5 million people bought their homes through a land contract, more than 4.5 percent of all homeowners.
In 2009, the last year such data was collected, the U.S. census reported that about 3.5 million people bought their homes through a land contract, more than 4.5 percent of all homeowners. This probably underestimates the number, as many buyers don’t understand the transaction well enough to report it to the census. Most states require that land contracts be recorded, but many sellers do not bother to do so.
Yet the opportunities for abuse are plentiful. Most contracts for deed (CFDs) are not subject to the Truth in Lending Act and other consumer protections that most traditional mortgage borrowers enjoy. Under a CFD arrangement, the buyer has all of the responsibilities and headaches of a homeowner, including repairs and paying property taxes and insurance, without actually owning anything. Yet buyers have fewer rights even than tenants, who can at least call the landlord to fix a busted toilet or broken lock.
“These contracts exist in a regulatory ‘no-man’s land’ between tenant protections and homeowner protections,” says Sarah Mancini, an attorney with the National Consumer Law Center and co-author of a 2016 report about contracts for deed, “Toxic Transactions: How Land Installment Contracts Once Again Threaten Communities of Color.” “These aspiring homeowners have neither,” she says.
Assuming all the risk, if contract buyers miss a payment, they can lose all their previous payments and investments they’ve made in maintaining the house. Because they are technically not owners, buyers may be quickly evicted under forfeiture procedure, without the increased protections of foreclosure law afforded to homeowners. Think “repo” of a car, not a home.