It’s a kind of Catch-22, compounding structural problems many Black buyers face in the housing market: instead of making those homes affordable and obtainable, low valuation only serves to make financing for them less accessible and more exploitive.
As of 2015, 14% of single-family homes (643,000 homes) were in the $10,000 to $70,000 price range, according to the Urban Institute. Only about a quarter of them are financed with a traditional mortgage. The rest are either bought for cash, often by speculators, or financed by other means, especially land contracts.
In The Case for Reparations, Ta-Nehisi Coates defined land contracts as “a predatory agreement that combined all the responsibilities of homeownership with all the disadvantages of renting — while offering the benefits of neither.” Also known as contract sales, bonds for deed, or contracts for deed, land contracts are a form of seller financing where the buyer puts down a down payment on the home, then makes monthly installment payments to the seller, typically for 15 years at high interest rates. The seller retains ownership of the home until all the payments have been made.
In theory, the buyer gains legal title to the home once all the payments have been made. In practice, land contracts are largely unregulated, one-sided transactions between parties with unequal power, often rife with abuse and exploitation by sellers, and often not resulting in homeownership for buyers. Using a “forfeiture clause,” sellers can terminate the land contract if the buyer misses a single payment and repossess the house, while profiting from the payments and the value of improvements the buyer made. The “buyer” is then left with nothing. Bad-faith sellers can repeat the process serially, “churning” the same property multiple times using contracts deliberately structured to make it hard for buyers to comply fully and gain title to the property. Between predatory rates and frequent forfeitures, it’s estimated land contracts extracted between $3 billion and $4 billion from Black households in mid-century Chicago.
Nonetheless, land contracts are still common, since they fill a large, structural gap in the mortgage market. Millions of households hold them, including 12% of Black households that finance a home purchase. Given how embedded land contracts are, many housing advocates argue that their abuses can’t be fixed by abolishing them.
Land contracts saw a resurgence nationwide in the wake of the Great Recession and the subprime mortgage crisis, especially in Black-majority neighborhoods with a significant small-dollar housing stock where residents have limited access to lending or capital. That’s a considerable portion of the housing market affecting millions of families. Could land contracts somehow be reformed or transformed to work for them?