Making land contracts work for buyers

Evelyn Zwiebach sees the potential to redesign land contracts to benefit buyers and encourage good-faith sellers.
Feb 2, 2022
Andre Perry
Andre Perry
Senior Fellow
Brookings Metro
Stuart Yasgur
Stuart Yasgur
Economic Architecture

She is senior program director for state and local policy for Detroit with Enterprise Community Partners, Inc., and co-author of the “In Good Faith” report.

Enterprise is a national nonprofit which creates and invests in affordable homes, provides resident services, supports community organizations on the ground, and conducts policy advocacy. Working with local partners, Enterprise has preserved and built 793,000 affordable homes and invested $61 billion in communities nationwide.

Zwiebach fully acknowledges the failures of the land contracts, especially in Detroit: They lack transparency – an estimated 80% of them aren’t even officially reported. What federal and local regulations exist governing them are poorly enforced. The contracts themselves often don’t even meet the standard for a legally valid contract, since they omit such key information as the purchase price, interest rate, and monthly payment. And sometimes, what purport to be land contracts aren’t even land contracts at all, but even more predatory rent-to-own agreements or leases with a purchase option.

As Ta-Nehisi Coates points out, land contracts combine the disadvantages of renting with the burdens of homeownership. But Zwiebach believes it’s possible to flip that equation, and redesign them so they give buyers the benefits of homeownership on affordable, non-abusive terms. “Some community development organizations (CDOs) are acting as responsible land contract sellers,” she says. “They’ve been able to use land contracts as a way to get people who can’t qualify for a mortgage, or can’t afford homeownership otherwise, onto a path to homeownership. And they have had good success. That kind of community development approach to land contracts can help counter other types of actors in the land contract marketplace.”

And while mortgages may be preferable, they are not a panacea, either. “In an ideal world, a mortgage is almost always better than a land contract,” Zwiebach says“But the Detroit housing market is not an ideal world. It’s not easy to get a mortgage. The mortgage industry is rife with discrimination against buyers of color, and many people just can’t qualify for one.”

Even assuming they could, obtaining a mortgage and the deed to a home doesn’t always guarantee housing security. On the contrary, since 2008, one in three Detroit homes was foreclosed[viii] on because owners fell behind on property taxes – the highest tax foreclosure rate of any U.S. city since the Great Depression. Several studies have found the lowest-valued homes in Detroit are over-assessed, putting thousands at unjust risk of foreclosure.

“The question is, how do you make homeownership sustainable?” said Zwiebach. “Will buyers in Detroit still own their home in five or ten years?” There are growing efforts to assist owners who might have been illegally over-assessed, for example by removing assessments that were too high based on their income, helping them claim a property tax exemption they qualified for but didn’t know about, or coming up with payment plans for back taxes owed. But the risk of foreclosure remains high. “Many people in Detroit who were once homeowners lost their homes,” said Zwiebach.

Since much of Detroit’s small-dollar housing stock is in disrepair, land contract buyers often struggle with the added burden of correcting deferred maintenance, and/or living in substandard conditions. “Home repair is a huge challenge,” Zwiebach says. “Especially with land contracts, people may be moving into homes that are barely habitable or have major issues. Buyers may find they can’t keep up with the needed repairs. That raises the risk they could lose the home, and it also raises health and safety hazards.”

She describes a kind of “philosophical debate” about whether land contracts are better than the alternatives: “Is it acceptable for people to buy homes with leaks and lead contamination? Many of the rental options are just as bad, if not worse. And what’s the alternative — homelessness?” In Detroit and Southeast Michigan, good-faith actors such as nonprofits and community development organizations (CDOs) use land contracts to get their clients housed, in some cases helping them buy homes that require significant repairs with land contracts, then working with them on rehab. Is that exploitive, or simply pragmatic?

“Land contracts are a divisive topic,” Zwiebach says. “Reasonable people in this space will disagree. Many people in the community development world are very passionate about keeping land contracts available as a tool, and not eliminating them by overly regulating them, or converting them into mortgages. It’s a question of striking the right balance. What can we do to disincentivize bad-faith actors, while making it easier for good-faith actors to work in this space?”

The “In Good Faith” report makes a series of recommendations for striking this balance, ranging from modest changes to sweeping ones. Some are basic legal and regulatory reforms: limiting or nullifying forfeiture clauses under various circumstances, requiring clear contract language specifying payment terms and other key provisions, recording land contracts within 30 days of signing, requiring insurance and inspections, or giving regulatory agencies more resources for enforcement. Others would shift market incentives by capping interest rates and tying them to the market index, for example floating 2% above market rates. That would lower the risk of forfeiture from usurious interest rates and discourage predatory sellers.

These are fundamental, structural changes, adding up to a kind of blueprint for redesigning the $200 billion land contract market as a viable alternative to mortgage financing which serves rather than exploits homebuyers. “Land contracts can be structured and administered to proactively promote positive outcomes for buyers,” the report finds. “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.”

The report also recommends investing in widening access to mortgage financing through programs like Detroit Home Mortgage, which offers financing for under-appraised homes. That would help reduce reliance on land contracts. But in challenged markets like Detroit, even with expanded mortgage access, there will still be significant gaps where mortgages aren’t available or aren’t a good fit, and a need for alternative financing. Redesigning land contracts has potential to fill those gaps in a non-abusive way that benefits buyers, good-faith sellers, and communities. That would constitute a major structural shift in the small-dollar housing market.

More articles