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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The Confounding Contradictions of Detroit’s Land Contract Houses

Detroit   It was a rough day on the doors in Detroit. One team recorded 14 abandoned houses out of the 17 on the walk list. Remember that these were all homes according to all available records that are owned by one of the big three land contract companies operating in the city: Harbour Portfolio, Vision Property Management, and Detroit Property Exchange, the only local outfit. Another team had eight on its list, and we had six on ours. The math is unsettling and profound, meaning that more than half of the houses these companies owned were abandoned and therefore open wounds bleeding on their blocks, neighborhoods, and community.

There were three dumpsters in the driveways of the abandoned houses our team visited and a trailer at another with a couple of bags of trash on it, but no signs of workers or work being done at these locations. At one location that we marked as “not home,” because the neighbor across the street told us that there were people going in and out of there and work being done, who knows what the story might have been, but the impression from the other locations on our list, left me wondering if these were dumpster “decorations,” rather than construction sites. We were roughly, and it was often rough, in central Detroit, if there’s such a thing, while one team was on the East Side and another was on the West Side. They reported no dumpsters and signs of construction on the abandoned houses on their lists. Don’t get me wrong, the land contract houses were absolutely not the only abandoned houses, and we saw abandoned houses on our route that were not not on our list but had signs offering them for sale, if one could call it that, or auction, with come-on’s hawking $400 a month down payments and lures advertising opportunities to flip the homes or rent-to-own more cheaply that buying. Once we were back at the offices of the historic and giant Ford Motor based UAW Local 600, which had opened their doors to the Home Savers Campaign for this project, we discovered, to no one’s surprise at this point, that both of the names on the signs we saw were simply other eye-candy LLC’s that were part of Detroit Property Exchange.

rent-to-own signs from Detroit Property Exchange subsidiary

Visiting with people, the contradictions are confounding. Our first visit was a woman with had just completed a contract with DPX as locals call Detroit Property Exchange, though her house had been listed under their French Sirois subsidiary. She had been in the home for 12 years and dutifully paying off a mortgage, until two years ago. She was informed then that DPX had bought her home by purchasing a $6000 tax lien. She had being paying everything in the usual bundle to her mortgage servicer, who had gone bankrupt and not paid her taxes, so Wayne County had put her in play without any notice. DPX gave her a contract to buy back the house for $20,000 while paying $750 per month as part of a lease to live there. She was happy because she had managed to pay them off in 18-months, partially by taking advantage of two “matching” opportunities, one at income tax refund time, where they had matched her $2500, and another a month or so later when they matched her $1000. She was proud of herself for getting them off her back and saving her house, but the math still adds up to street-side robbery. She had paid DPX $16,500 on the contract plus another $13,500 in rent, or whatever you might want to call it, so they had $30,000 from her in a year-and-a-half by stealing her house from the taxman when her mortgage servicer went belly up. The day before another team had stumbled onto a similar case, so this woman’s story is, tragically, too common.

Vision Property Management lockbox on abandoned hous

All of these contracts are predatory, though and people were being ripped off right and left, but one home we visited we talked to the brother on the porch, who was apologetic that he had not gotten his act together to buy a house, while both of his sisters had just done so, though we knew this sister was on a rent-to-own contract with Vision Property Management and suspected that was the case with the other as well. Earlier in the morning, I had briefly addressed more than 50 people in the regular meeting of the Detroit Action Commonwealth at the Capuchin Soup Kitchen. People there knew about land contracts, and they knew ACORN, so I was in good company. After a brief explanation of what the Home Savers Campaign was there were questions flying from the crowd. One caught me up short and has left me thinking more and more about these contradictions. A young man said he was on SSI payments of $750 per month. His question: how could he get one of these rent-to-own houses?

Detroit Action Commonwealth Meeting

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Predatory Land Contracts and Rent-to-Own Schemes May be More about Affordable Housing than Home Ownership

Detroit   We had hit the front door a couple of times without success. The house was a single-story white brick facade set back from the street. If we had not been anywhere other than the west side of Detroit, we might have been able to blink our eyes and believe we were in a working-class suburb. We would have had to clear our minds of the vision of driving only minutes before in street after street of neighborhoods where the grass was already knee-high across acres and acres speckled with the occasional occupied house along with some deteriorating ghost structures.

The local public radio reporter rolling with us on assignment from Reveal, the well-regarded national investigative pod-cast operation on the West Coast, offered a weak apology earlier, saying something about hoping this wasn’t all we would see of Detroit. I had replied that I had been here before, and Dine’ Butler, an organizer with me, reminded her that we were from New Orleans, where we had post-Katrina neighborhoods like this as well.

We knew someone was home because the back end of the small SUV was wide open. Dine’ went around the side to the fence, and we quickly met the master of this castle. We knew he was on a land contract purchase agreement with Harbour Portfolio. He had been in the house 2-years, and had looked at a lot of Harbour houses before seeing this one and believing he could make a “go” of it. He had paid about $1500 down payment on a $42,000 purchase price with a 30-year contract at between 12 and 13% interest with monthly payments between $400 and $500. His family had been there for 2 years. He had put in about $7000 cash having to install a new furnace, roof, and wiring, which was still a work in progress. I asked him how he “felt about it,” and he said, “it’s all right for now until something better comes up.” Could he have applied for a conventional mortgage, I asked, and he answered, “not at that time.” He would be glad to come to a meeting and share his experiences and talk to others in the same situation.

The more visits we log, the more that it seems to me we aren’t hearing the responses we might expect from typical home buyers or home owners. Too often when we peel back the layers of these predatory contracts with people, there reaction isn’t surprise and in fact often seems more flight, than it is fight. People are often shocked by how bad their contracts are, but seem to have their eyes wide open to the fact that their housing is substandard. With the average rent in Detroit for a two-bedroom apartment reportedly $1300, many of them seem to almost be doing the math in their heads that even with a down payment and making repairs with sweat equity and cash on hand, they may be in better financial shape in these houses, even if they are at best “works in progress,” and at worse uninhabitable.

We haven’t hit enough doors and talked to enough people yet on the Home Savers Campaign, but listening to people and hearing what they are really saying, there’s no question that these land contract and rent-to-own or lease purchase schemes are predatory, but the crisis we are facing may be less about home ownership in the classic sense, and speaking a lot more to the crisis in available, decent affordable housing. With decreasing public housing units and section 8 vouchers and long waiting lists for both, with rising rents that are taking 50% or more of many household incomes on one hand, and an unforgiving post-2008 credit desert on the other with higher down payments, higher credit scores, and higher bank lending requirements, a lower income, working family may find themselves caught in the middle where a bigger place in rougher condition for lower monthly rent and pay-as-you-go repairs comes to look like a deal worth taking, everything being unequal. Heck, they may figure, there’s a slim chance, like playing the lottery, that they might even own the house some day…a carrot later, while being beaten by the sticks now.

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“Option to Buy,” another Twist on Predatory Purchase Schemes

Detroit   Preparing for the Home Savers Campaign teams to hit the doors in Detroit and visit with victims of the various installment land purchase and rent-to-buy schemes in the city, a crew of us sat down for a preliminary briefing with Joe McGuire, a staff attorney with Michigan Legal Services who has tussled with a number of these companies while representing their low-income clients. Joe was a fount of information and couldn’t have been more helpful, but much of what he told us was depressing in the extreme.

Perhaps what demonstrates this bleak credit desert for lower income and working families in the Motor City most vividly are the terms of one lease he shared with us promulgated by a company called Bean. It’s hard to make a rent-to-own agreement look good, but the Bean agreement was a “residential lease and option agreement,” which, when read closely, was really only a one-year option to buy the property with absolutely no guarantee that the agreement would be extended past the one year allowing the “lessor” to finally purchase the home, even if they had met all conditions of the agreement perfectly, unless of course they magically came up with the full purchase price within 30 days of the end of the lease. The mishmash of legalese really was simply a one-year ripoff and an option-to-steal by the lessor from the lessee. The terms started with a $4000 down payment for the “privilege” of purchasing the house for $30,000. An additional “option consideration of $130 per month” would be paid toward the “down payment/purchase” of the property as well as $645 per month throughout the one-year term which was the lease on this “as is” house. Any repairs, “major and minor” would be paid for by the “optionee,” and if any are paid by the “optioner,” they are added onto the purchase price. McGuire was as stunned by the agreement as all of us were.

Much of what he told us was equally bleak. The city requires an effective warrant of habitability before people move in, and all rental units, including those on rent-to-own contracts are required to be registered, but it became clear there was little to nonexistent enforcement. Even so, McGuire felt the protections for rent-to-own were better than those for land contracts, because they were even better shielded by state law with little thought that the legislature would improve them. In a sobering catch-22, McGuire actually made the case as we were leaving that he worried that tightening down on rent-to-own abuses might lead to more land contracts, which given their legal protections would be even worse for the victims. Forfeiture to the city and the Detroit land bank seemed equally fraught and neighborhood crippling.

The conversation was not without some rays of hope. Work by some of the anti-eviction groups was encouraging. Data being prepared in cooperation with local universities and professors might offer some opportunities. Focus on concentrated neighborhoods where this kind of activity might be curtailed, McGuire felt could show results.

The odds were long, but we were welcomed into the fight. Any push back would be a positive. Any effort to force more accountability by victims would be helpful. Detroit might be ground zero for this campaign, but there were mountains to climb with uncertain footholds on every route.

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UAW Reveals the Deal for VW Recognition in Breakthrough

To match Special Report USA-AUTOS/UNIONNew Orleans    The Chattanooga Choo-Choo is whistling for a big stop at the Detroit headquarters of the United Automobile Workers (UAW). When Glen Miller and his band recorded that song, it was the first million selling record ever and got the first gold record for its popularity. There will soon be a similar celebration at UAW Solidarity House for their first successful organization of a foreign automaker after years of organizing, once Volkswagen honors a previously confidential agreement to recognize the union.

That’s the spoiler alert and a warning that there’s going to be some yahooing on my part of the “I told you so…” and “You heard it first here!” type from yours truly.

In recent days I read a Politico “Morning Shift” bulletin revealing the following:

Volkswagen is expected to change a company policy this week that the United Autoworkers believes will lead to recognition of its local union at a company plant in Chattanooga, Tenn. according to a UAW letter to members of the local. ‘We await details from the company on this policy and will share more thoughts after the announcement,’ the letter said. According to the UAW, the union told the company last spring that it would take certain actions that would help VW bring production of a new SUV to the plant. The UAW also said it would drop a National Labor Relations Board challenge to last February’s failed union vote. According to the UAW letter, VW agreed that if the UAW would take the specified actions, VW would recognize the union.

In earlier reports, we have discussed all of this when the UAW leadership first chartered a local union, Local 42, at the plant and began enrolling members directly in the local in an exciting experiment. More recently the UAW had announced that they had signed up more than 50% of the workforce. The importance of that announcement now becomes clear because the company would not have been able to voluntarily recognize the union unless it could verify a majority expression of support.

We always have to beware of “premature certainty,” but the UAW headquarters would not have authorized the local’s release of a letter to its members without being 100% sure that this deal was done and without a wink-and-a-nod of understanding from VW that they were going to start leaking out the good news so that the members were ready.

And, now for the “I told you so” reward for faithful readers and listeners of the Chief Organizer’s Report. The cognoscenti among you may remember a short six months ago, April 22nd, 2014 to be exact, a report on the UAW’s withdrawal of election objections and my contrarian position that this step indicated a deeper commitment and a likely understanding the company and their union allies in Germany. Here’s what I said then:

Politicians and the in-plant anti-union committee at Volkswagen in Chattanooga were both chortling and celebrating the announcement that the UAW had withdrawn its election objections before the NLRB hearing on the issues raised in its recent, narrow defeat. They are laughing too soon. They are actually totally misreading the organizing tactics, and interpreting a tactical withdrawal as a concession, rather than the more accurate understanding that this is a huge signal from the UAW that they are in fact deepening their commitment to keeping the campaign alive….

I added more fuel to the fire by speculating that the UAW had no doubt been in discussion with the company and their union allies on the board of the German company:

You can also bet that UAW leaders have had extensive discussions with Volkswagen union leaders in Germany, who have board seats in the company, about how a second election would work and how the company would react….

I may have been a little off the mark in believing part of the setup was for a second election, thinking that tactically the union and the company would in fact want one to poke their community opposition politically and in Chattanooga in the eye, but I can understand why they would also want to grab the bird in the hand without taking the risk, even if the rewards might have been greater.

Where I was right on the numbers though was on the quid pro quo with the company, strategically:

The other reason it is easy to read the UAW’s intentions can be found in their statements upon the withdrawal. Shrewdly, they withdrew by laying down the gauntlet to the Tennessee governor and local business establishment to hurry up and restore the $300 million in incentives for VW to locate a new SUV line in Chattanooga which would add another 1000 workers to the mix. This is a win-win for the UAW. It gets them back into the framework of being a job creator rather than a job threat, which had sunk their first vote. If the Governor and the union baiters can’t convince VW to add the line, they are losers, bullies, and blowhards, and the UAW doesn’t have that problem on its shoes. Moving the campaign right now to restore the commitments to add the line also turns the bargaining power from the politicians back to the company and its allies. The UAW is no company union, but any Tennessee politicians have to know that VW is not going to add 1000 workers in Chattanooga without a behind the scenes commitment that the pols and the local chamber will keep out of its employee relations in the plant.

Enough said! The haters and the baiters and the politicians are going to have to grin and bear it, and shut their pie holes this time, because the union is now going to be there to stay in the VW plant in Chattanooga, Tennessee. The South and the Union will rise again!

***

Please enjoy Andrew Mark Schaffer’s Serenity Now.  This song is about suicide prevention.

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Public Employers are Dangerously Confused about Protecting Workers’ Pensions

PensionsShreveport    Pensions at their core are deferred wages set aside for the future use of workers when they are unable to collect their salaries.  If there were no pensions, presumably wages would be higher, depending on tax policies of course.  Employers and politicians would never think they had the right to raid their workers’ money once it is securely in their pockets, depending on tax policies of course, but when it comes to pensions they seem not to hesitate for a moment at least if we look at recent examples of confusion run rampant in Detroit, the United Kingdom, and, sadly, some of the controversial, so-called “model” charter schools running unaccountably in New Orleans.

The situation in Detroit is now well known.  In the city’s bankruptcy officials and bondholders both high and low felt it was open season to reduce and eliminate pensions for career public servants, finally saved somewhat by the state government coming in and passing a measure to bailout most of the pensions.

In New Orleans, The Advocate spoke of a pension mess in the ReNew six-school charter operation perhaps too kindly as needing “clarity,” when the real demand should have been about the missing level of accountability when schools have no elected boards to oversee their financial shenanigans and think every dollar is fair game.  The rules for the Teacher Retirement System of Louisiana are clear:  all are in or all are out.  ReNew tried it all sorts of ways.  They tried to put one school in, keep the other six out, allow 21 teachers in out-schools in, and enroll 41 other school workers in that shouldn’t have been in.  This isn’t about clarity, it’s about chaos verging on criminality, because neither did ReNew pay the required Social Security payments on the workers.  The IRS and the state will have to straighten it out, but administrators clearly felt when it came to pensions way down the road, it was anything goes.

According to a columnist, Pauline Skypala, writing for the Financial Times, that about sums up what the Cameron government is trying in the United Kingdom as well, but not just for public employees but all of their workers.  She refers to it as “confusion,” but writes about the scheme as contradictions.  The government allowed pensioners to cash out of the system after they retired, which seems crazy and irresponsible, and on the other hand created something she refers to as a collective defined contribution (CDC) plan where everyone stays in, a defined contribution is made, and the benefits go up and down based on the security or volatility of the market-based investments.  Yikes!  Supposedly there is no “too low to go,” but when pensions mix politics, who really knows.  Supposedly, they are copying a similar system used in the Netherlands, but there everyone is in, the investments are mostly in not-for-profit huge pension funds, and long term trusted, “safe” holdings.

Since the devastation of the great recession in 2007, not even George W. Bush wants anyone to remember he once proposed converting the entire Social Security retirement system in the US to 401k plans that undoubtedly would have had a feeding frenzy on collateralized debt obligations and fancy products that no one understood based on algorithms from another planet, while leaving millions of seniors with nothing.

The only sure thing is that everyone gets old, and if they worked, and voted, to defer their earnings for a safe and secure retirement with the wolf far from their door, then politicians and employers need to make sure they view at least that commitment as a sacred trust.

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