Redlining, the federal government’s practice of refusing to insure mortgages in or near Black neighborhoods, dictated where Black people could or couldn’t buy a home.
And even long after the 1968 Fair Housing Act made it illegal to discriminate against homebuyers on the basis of race or national origin, lender practices effectively excluded Black people from buying homes outside certain neighborhoods.
This history has left a legacy of a vast number of Black homebuyers who lack access to conventional financial services. Land contracts are used to fill the gap, but they do so in a largely unregulated way.
The origin of the instrument dates back to the mid-nineteenth century, when laissez-faire economics predominated, and courts favored the notion that individuals with free will could look after themselves. Government oversight was therefore minimal and the burden was on buyers to protect their own interests – caveat emptor. But if buyers lack financing alternatives, they lack the leverage to negotiate better terms for themselves.
Today, land contracts fall under the jurisdiction of the Consumer Financial Protection Bureau, but its oversight remains limited. Whereas the subprime lending crisis strengthened federal regulation of mortgages, regulation of land contracts remains loose and poorly enforced. Authority over them falls mostly to cities and states, resulting in an inconsistent, inadequate regulatory patchwork that provides few protections for consumers.[i]
While there is no hard data available on how many land contracts result in home ownership for would-be buyers, there is lots of anecdotal evidence that many don’t. Most land contracts contain forfeiture clauses which quickly terminate the contract if a single payment is missed, or any other contract terms are breached. In that case the property reverts to the seller, who gets to keep everything the buyer has paid in, including the down payment, monthly payments, taxes, and insurance, plus any home improvements. The seller is then free to sell the property to other buyers.
Data on the prevalence of land contracts is also spotty, since only a fraction of them are ever officially recorded. But experts estimate 4 million families have land contracts totaling $200 billion, or about 5% of the non-rental single-family residential market.
In certain regions and cities, the relative proportion and impact of land contracts is much greater. A recent Federal Reserve Bank of Chicago study looked at the 407,237 recorded land contracts nationwide found that 69% were concentrated in six midwestern states, including 25% in Michigan. The 2009 American Housing Survey conducted by the U.S. Census Bureau[ii] estimated that in the Detroit region, land contracts accounted for 12% of financed home purchases by African-Americans, vs. about 5% for households of other races.[iii]
In Chicago in the 1950s and 1960s, an estimated 75-95% of home “sales” to Black families were via land contract. A recent Duke/University of Illinois Chicago study found that Black buyers who entered into these contracts lost between $3 billion and $4 billion.[iv] The average price markup on homes “sold” was 84%. Buyers paid an average $587 more per month than if they had bought them with a traditional mortgage.
In Michigan, especially in the Detroit area, Black homeownership rates fell more than 20% during and after the Great Recession, from a high of about 51% in 2000 to about 40% in 2018.[v] It’s a combined effect of income loss, damaged credit, a falloff in mortgage lending, and a wave of mortgage and tax foreclosures. The City bought up foreclosed properties, then sold them in bulk at discounted prices to investors, who in turn used land contracts to resell them for high prices. For example, in 2014, a property was foreclosed for $11,200 in unpaid taxes, bought at auction for $833 by one of Detroit’s biggest bulk land buyers; then sold via land contract for $15,900.[vi] In 2015, it’s estimated that more land contracts were filed in Detroit than mortgages, though precise numbers aren’t available, since one in five land contract “sales” in Detroit is recorded.
Since they often end in foreclosure, and predatory investors continue to “churn” land contracts by “selling” and initiating forefeiture on the same property multiple times, the land contract surge in Detroit set up a vicious cycle of lowering neighborhood property values and extracting wealth from Black communities.
While there is insufficient data to know exactly how prevalent land contracts are, or how much wealth their abuses extract from Black households, there is enough data to show that land contract sales constitute a significant segment of the housing market, characterized by structural market flaws and distortions and policy failures disproportionately affecting Black people.
The question is, could they be remedied? Could the land contract market be redesigned and leveraged for better outcomes? Given its size, is there an opportunity for land contract reforms and/or new financial products to serve the small-dollar home market?
A University of Michigan / Enterprise Community Partners policy brief entitled “In Good Faith: Reimagining the Use of Land Contracts”[vii] argues that land contracts could be restructured to discourage abuse and encourage good-faith sellers. “While land contracts have an extensive and ongoing history of exploitation,” it finds, “they are not inherently predatory, and they remain an important tool for buyers and sellers alike, particularly in challenged housing markets.”