Professor of History, Rutgers University-Newark
A sure-fire way to lose one’s property is to pay too much for it — or to buy it on terms that are so onerous as to be predatory. Both problems are endemic to properties purchased “on contract,” that is, on an installment plan. I detailed the full repercussions of predatory contract sales in my 2009 book Family Properties: How the Struggle Over Race and Real Estate Transformed Chicago and Urban America. That book described the mid-twentieth century exploitation of black Chicago homebuyers through predatory contract home purchases, a period during which banks’ refusal to make mortgage loans to African Americans left many with no alternative but to buy on contract. Unfortunately, since the 2008 subprime meltdown, the practice has been revived, with predictably tragic results.
From the buyer’s perspective, purchasing a property on contract (also known as an “installment land contract,” “contract for deed,” or legally, “Articles of Agreement for Warranty Deed”), combines the worst of buying and renting. In a contract sale the seller of the property provides the credit for the purchase – but on harsh terms. Buyers must make a down payment. They are also responsible for taxes, insurance, maintenance, and interest. However, most installment land contracts specify that if the buyer misses even a single payment, the contract seller can repossess the property, keeping everything that the buyer invested to date. Most also specify that all maintenance on the property is the responsibility of the contract buyer. If the price charged for the property is excessive, or if maintenance costs are unusually high, then a missed payment and subsequent loss of the property is not uncommon.
In the mid-twentieth century, contract selling became an easy way for white speculators to exploit African Americans’ dreams of home ownership. In cities across the country, speculators used borrowed money to buy properties from whites. They then immediately sold those properties on contract to black buyers – routinely charging them double, and sometimes quadruple, the prices they’d paid. Black buyers who could not keep up the exploitative payments lost their homes. In Chicago, many of the most active contract sellers repossessed scores of properties every year – retaining the down payment and all money that their black buyers had invested to date.
selling died down in the 1970s as the now nominally illegal practice of bank
redlining lessened in frequency, and as flawed federal housing programs created
new ways to exploit black homebuyers.[i] Unfortunately, it has reemerged in full force
since the 2008 subprime meltdown. Hedge
Funds like Harbor Portfolio Advisors have purchased thousands of foreclosed
homes from Fannie Mae (the Federal National Mortgage Association) for about
$5000 each. They sell these properties days later at massive markups — $30,000
to $60,000 each. These properties have often been abandoned for years, and are
in severely deteriorated condition, yet the contract buyer is solely
responsible for the often staggering costs of restoring them to a habitable
condition. These costs mire them in debt
and force them to miss payments, ensuring the loss of their properties. Once again, those with plentiful access to
credit are using contract sales to manipulate minority buyers’ dreams of
mobility in order to entrap and defraud them, resulting in enrichment for the
hedge funds, and property dispossession for those most in need. [ii]
[i] On the 1970s FHA-HUD scandal, see Keeanga-Yamahtta Taylor, Race For Profit: How Banks and the Real Estate Industry Undermined Black Homeownership (University of North Carolina Press, 2019).
[ii] On the recent resurgence of predatory contract selling, see Jeremiah Battle Jr., Sarah Mancini, Margot Saunders, and Odette Williamson, “Toxic Transactions: How Land Installment Contraacts Once Again Threaten Communities of Color,” National Consumer Law Center, July 2016, https://www.nclc.org/issues/toxic-transactions-threaten-communities-of-color.html