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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Citizen Wealth in Home Ownership is Becoming Citizen Inequity

New Orleans   A couple of years ago I wrote a book called, Citizen Wealth: Winning the Campaign to Save Working Families. It was commonly known that for low-and-moderate income families the largest index of any wealth they possessed was based on whether or not they had managed somehow to become a homeowner. At ACORN we had fought that battle for years in order to get banks to fairly offer mortgages to lower income families so that they could acquire single-family homes or coops, and in those fights had won billions allowing millions to own their own homes. It was certainly not enough to achieve any semblance of equity, but it was a good step forward, particularly increasing the home ownership percentages of African-American and Latino families to record levels, although almost all of those gains were wiped out by the 2008 Great Recession.

In doing the research for the book, I was shocked that the largest so-called social program in the nation’s budget, dwarfing direct welfare, food stamps, and all other housing benefits, both singly and collectively, was the mortgage interest deduction, which now totals more than $70 billion annually. As disturbing was the degree to which the mortgage interest deduction was largely not a social program which benefited the citizen wealth of lower income families but was disproportionately benefiting middle class and wealthy families. After all, at the threshold where such an income tax deduction had real financial weight and meaning, a family had to be in an income bracket high enough to justify itemizing their deductions.

As the Home Savers Campaign this year has visited with families in a number of cities in the Midwest and South, it has also struck all of us that as blatantly predatory as many of these contract for deed and rent-to-own scams have been to the families victimized by them, many of these families have accepted the risks even accepting the dangers and the deceit, simply because they were desperate for housing they could afford, no matter its condition. For the same reason, the reaction of many victims when they realize they have been swindled has often been as much anger as it has been resignation, and a feeling they should walk away, rather than fighting for justice for their investment, all of which speaks to the crisis in affordability.

Reading “House Rules” by Matthew Desmond in the New York Times there were more facts and figures that underlined the affordable housing crisis which is driving income and racial inequality throughout the country. Some facts:

  • The average homeowner boasts a net worth ($195,400) that is 36 times that of the average renter at $5400.
  • With rising housing costs the housing standard where 30% or less of a family’s income equals affordability, half of all poor renting families spend more than 50% of their income on housing costs and 25% spent more than 70%.
  • In 2011, the median white household had a net worth of $111,146, compared with $7113 for the median black household and $8348 for the media Hispanic household. If black and Hispanic families owned homes at the same rate as whites, the racial wealth gap would be reduced by almost a third.

There was much more, but you get the point. Worse, the consensus is that there is no political constituency for reform of the mortgage interest deduction, nor in the absence of reform an equivalent program or benefit that would help renters or bring balance to this wealth and racial inequality.

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