Assembling the Facts on the Ground about Land Contracts in Detroit

Oakland   The back of the envelope figures from three days on the doors, based on reports logged into the database by our teams in Detroit, indicate that of more than 125 doors hit, half of the properties are abandoned. That’s not good for neighborhoods, the City of Detroit, or the future prospects of building viable communities there. We increasingly began to question how good this level of abandonment of land contract and rent-to-own properties is even for the companies that specialize in this seamy side of the housing market in urban areas.

As a business model that fits snugly in the category of what a reporter for the New York Times termed the dominant modern “flagrant exploitation economy,” the companies operating within this most predatory segment of the housing and rental market face challenges. By process of elimination of usual factors, an economist speculating on principal cause of the 2008 real estate collapse is now arguing that there was an irrational psychology that almost spread virally that vast sums were to be had by “flipping” real estate, which like the tulip craze in Holland and so many other bubbles of the previous centuries, led to the unsustainable inflation of prices until the crash. Detroit Property Exchange is still pushing that myth in lower income communities with its signs that urge potential customers to call 888-FLIP to connect with the company.

Certainly the lease and contract documents starting from “as is” and including the company’s rights to evict the “buyer” immediately for even a single missed payment at any point in the term of the agreement, lead one to believe that these companies are making their money by flipping the contracts from one “sucker” to another, as an on-line Detroit magazine called the Bridge, writing about our campaign described the buyers. We are not convinced that theory translates into facts on the ground from our doorknocking. Additionally, Professor Josh Akers shared with us an overview of research he and a colleague are soon publishing on land contracts in Detroit over the 10-year period from 2005 to 2015. The largest dozen contract sellers were involved in almost 7500 acquisitions, which was less than 10% of the over 80,000 properties in Detroit that had been acquired through tax auctions or REO’s from various governmental foreclosures. In that period contract sellers had gone through eviction procedures for about 1 out of every 3 properties, but evictions with specific properties acquired by all buyers involved eviction procedures at the ratio of 1 out of every 4 properties, which is not a world of difference. Over a 10-year period that doesn’t translate into a constant churn, likely because there is tepid demands that these practices have inevitably created in these neighborhoods.

Because there is not a robust market for these properties from stories the Home Savers Campaign is hearing on the doors, it seems that tenants wanting or willing to stay in these properties are able to negotiate a fair amount of forbearance even when missing payments because the sellers realize there isn’t a line waiting to open the door behind them. It also explains stories we have heard from several buyers where they are able to negotiate shorter terms when they are willing to take over the properties.

One reason may be the fact that many of these companies are not forwarding payments made by the buyers to resolve tax payments nor are they disclosing past liens on the properties. Lawsuits like those filed against Harbour Properties and Vision Property Management in Cincinnati to collect back taxes, fines, and penalties for their properties in that jurisdiction reveal a business model of nonpayment that seems to typify this part of the industry. That’s a ticking time bomb for the tenant-buyer for sure, especially given the rigid collection and delinquency procedures of Wayne County, and we have heard cases falling into this bad basket every day in Detroit, but it also seems to be leading to shorter term contracts and more negotiating opportunities if the campaign could engage the parties successfully.

We’re finding the handles, but we are not convinced yet that people want to grab them, given that many still see themselves as renters, rather than potential owners. That’s the puzzle we still need to find, even as we are understanding more and more about the market and these companies exploiting it.

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