Some community development organizations combine both approaches, selling supportive five- to seven-year land contracts, then working with buyers and banks to convert them to mortgages after two to five years.
“Some people think that’s a pretty interesting untapped market,” Zwiebach says, “and they have heard from banks that they’re interested in refinancing land contracts.”
That’s another way of restructuring the small-dollar market, and John Green is working to take it to scale. He is Managing Principal at Blackstar Stability. After 10 years working with large institutional clients and smaller emerging developers at a large commercial real estate investment management company in the Bay Area, he left, taking part of his team and other contacts with him, to found Blackstar. It focuses on high-impact strategies in commercial real estate and single-family housing, seeking solutions that keep families in their homes, have compelling risk-adjusted returns, and are scalable.
One of those strategies is land contracts, though Green is well aware of their flaws. “The prices these buyers pay are too high, the consumers are not protected, the property disclosures are very poor, there are no truth in lending standards, there’s a lack of transparency about the transactions, things as fundamental as reporting don’t happen, and even when they’re required by law, it’s very poorly enforced,” he says. “Texas requires recordation by law, and a study found roughly two thirds of its land contract sales are unrecorded. If you don’t know where the properties are, or who owns it, you can’t do anything about it. Many actors are intentional about keeping it that way.”
Land contract interest rates can be abusively high. Green cited one example of a $12,000 contract with a 24-year term at 20% interest. “It’s absurd; it’s like putting a mortgage on a credit card.” He sums up the economics of land contracts by quoting James Baldwin: “Anyone who has ever struggled with poverty knows how extremely expensive it is to be poor.”
But rather than trying to make the land contracts themselves more supportive, Blackstar’s approach is to refinance them on mortgages which better protect buyers’ rights, and to do it in bulk. “We buy large pools of properties that are encumbered by these contracts,” Green explains. “They’re available at meaningful discounts, and we purchase them outright on a fee-simple basis. Then we work with families to originate traditional mortgages on those properties.”
“We want to shorten the terms for buyers, and drive the interest rates ’way down,” Green said. “So we’re completing a sale transaction that otherwise wouldn’t be completed for 20 or 30 years, making them actual owners right away, and giving them the prospect of long-term ownership they rarely get with land contracts.”
The size of the pools Blackstar will buy varies from a few dozen homes to over a thousand. The sellers are typically investors getting strong returns on the properties. But they are nonetheless eager to sell. “Part of what we think motivates them at this point, despite the compelling financial returns they have realized from the land contracts, are the growing legal, regulatory, and reputational risks,” Green says.
He points to the widely publicized example of Vision Property Management, which was prosecuted for predatory practices by New York’s Attorney General, and settled for $600,000 in cash plus transferring clean titles to the families living in their New York properties. In a separate agreement with regulators, the hedge fund that financed Vision, Atalaya Capital Management, repaid $2.77 million in restitution to the consumers Vision harmed. Vision, and any companies in which its executives take a controlling interest, were barred from the residential real estate business in the state. Vision had also previously been sued for predatory practices in Wisconsin, Ohio, and New Jersey. Fannie Mae had stopped selling it foreclosed homes.
“The New York settlement was particularly aggressive,” Green says. “The AG not only penalized the operator, but reached through and penalized the hedge fund investors who backed it. That sort of thing is very chastening and has a big impact on owners’ willingness to walk through the mine field, especially in states that have demonstrated they are willing to go after land contract abuses.” After the New York settlement, Pennsylvania sought a similar one, and recently awarded 258 victims of land contract abuses the deeds to their homes, and is pursuing further compensation.
Such cases grab headlines and make an impression on market players. But that’s not the same thing as tackling the market’s structural problems. Litigation may constrain individual bad actors, but it has limited impact on the perverse incentives that attract bad actors to the market in the first place. For one thing, it isn’t always successful. And even when settlements are reached, they still have to be enforced. A year after the New York settlement was announced, some of the title transfers to families it required have yet to happen.
“The New York settlement was favorable for the families,” Green said, “but you can’t solve the problem that way. These legal avenues aren’t the solution. We think a fair opportunity to own the home with a reasonably priced mortgage is the solution.”
It’s an example of how interdiction and enforcement often fails to solve structural problems in markets, which require structural solutions. Doubling down on enforcement doesn’t change a market’s basic structure or correct perverse incentives built into it, it just increases the likelihood some bad actors might get caught. By contrast, Green’s approach of buying out land contracts and refinancing them with mortgages is a structural innovation that could restructure the small-dollar market.
But for it to catch on first requires some innovation in the mortgage market itself, which as currently configured isn’t conducive for refinancing land contracts. After all, the gap in the mortgage market and the lack of products for financing small-dollar properties is one of the drivers of land contract abuses. But there is a robust market for small-dollar second mortgages in the $40,000 to $50,000 range. Green thinks that this provides a precedent for building similar products for refinancing land contracts.
A secondary market for land contracts would be a game-changer, shifting the small-dollar housing market toward more accountable, equitable financing. Green believes it’s perfectly feasible. “We should be able to move pools of these that are performing and have been seasoned at pricing that’s comparable to second mortgage products,” he says. “The buyer should be able to expect similar yield to maturity, and it should be a reasonably liquid market.”
Building such a market would take a multi-pronged, step-by-step approach: raise the capital to buy land contract properties, cultivate a pipeline of underwriters interested in mortgage products that can refinance them, and create actual pools and products to demonstrate that refinancing land contracts with mortgages can work at significant scale.
That’s a clear pathway, which any innovator needs to go from structural insight to proof of concept to scaled change. Blackstar has clearly envisioned the steps and is working through them. It has set up an equity fund with an initial target of $100 million, and has already raised over $20 million, and it’s identifying mission-driven partners such as foundations and community development financial institutions that could contribute financing.
“Someone’s got to hold the paper long term, and there are natural prospective allies like CDFIs and CRA-motivated regional lenders that might do it,” Green says. “Our underwriting doesn’t rely on it, but there are ways of cultivating those relationships over time. The more channels we have, the more competitive mortgage products we can offer. But institutions have a much easier time underwriting actual collateral than a theory. We have to be able to show them, here’s what an actual pool looks like, here’s sufficient scale for it to matter to you, here’s the impact that you will have on these communities and these families.”
Blackstar is also talking with large companies, including a diversified financial services company, about mortgage products to refinance land contracts. Getting one institutional investor to participate can help attract others. In fact, Green sees an opportunity for large, national financial institutions to participate as well. “They have made representations about serving underserved communities, but they don’t exactly know yet how they’re going to do it, and they’re in search of solutions,” he says. “So there’s at least a willingness to engage in dialog. But they need actual products to underwrite, decide what the terms would be, and figure out how to get from the product to scale.”
As long as land contracts continue to exist, Green thinks GSEs should play an important role in refinancing them. But at the moment, GSEs are more focused on preventing land contract abuses – what Green calls “stopping the bleeding.” For example, Fannie and Freddie have restrictions preventing them from selling real estate-owned properties (foreclosed properties that didn’t sell at auction and have reverted to the lender) with land contracts. “That’s an important policy,” said Green, “but it will take a yeoman effort to enforce it, since most land contract transactions tend not to get recorded.”
Green believes that seller financing which builds in robust consumer protection could “readily address” land contract abuses, but he admits it isn’t simple or easy. “Even in some of our own offerings, we have to figure out if there’s even a way to craft a fair contract,” he says. “For example, for very small balance mortgages, the frictional costs can be untenable. But there are ways to take the asymmetry out of land contract transactions and make them less predatory. If you can do that, land contracts could be a better solution for some families and help fill the vacuum left by the lack of mortgage supply.”
Writing better land contracts and framing stricter legal and regulatory requirements and enforcement for them could make them less one-sided and more accountable. But making them work for buyers will take more than stronger legal and regulatory protections. It will also require structural innovations that shift fundamental market incentives away from exploitive, bad-faith sellers toward “supportive” good-faith sellers and responsible lenders.
Some of those innovations are emerging now. Community development organizations are writing “supportive” land contracts and working with buyers to fulfill them successfully. Practitioners like Zwiebach are coming up with ways to redesign the market, for example by capping interest rates and tying them to the market index and correcting other exploitive terms and omissions in land contracts. Both she and Green believe the mortgage market can also be innovated to impact the land contract market, both by increasing Black homebuyers’ access to financing for under-appraised properties so they’re less reliant on land contracts, and to develop a secondary market to refinance land contracts for those who can’t obtain small-dollar first mortgages. That would benefit lenders and buyers alike.
Land contracts grew out of devaluation of Black-owned assets, relegating them to small-dollar status and using it to impose predatory terms on them and to extract wealth from them, leaving their would-be owners dispossessed. But structural innovations like the ones Enterprise and Blackstar are pioneering are designed to transform land contracts from tools of devaluation and exploitation to tools of revaluation and empowerment. Rethought and restructured, land contracts may have the potential to overhaul the small-dollar housing market, secure homeownership for millions of Black families, and help preserve the value of Black-majority neighborhoods.