Beryl Satter
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.
Contract
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
