Most Americans who want to own a house – and can afford it – follow a fairly straightforward path to their dreams.
They start with a loan from a bank or mortgage company, institutions that are subject to state and federal regulations. When buyers close on the home they want, the agreement is registered with the government, usually at county offices.
Americans who do not qualify for a conventional mortgage but still want a house to call their own sometimes opt for a thinly regulated financial arrangement called a contract for deed. In these deals, the sellers function like lenders. They collect an initial down payment and then monthly payments.
The buyers in contract for deed agreements usually pay for taxes and insurance and they often pick up the tab for improvements and repairs on the property, even before they have title to it.
Often it’s only when the buyer makes the final payment that the title of the property shifts from the seller to the buyer.
Real estate experts, lawyers and consumer watchdog groups say these arrangements – as well as similarly structured rent-to-own contracts – rarely end with the buyer owning the home. What tends to happen instead is the buyer loses out through a process called forfeiture – often for falling behind on payments – while recouping none of the equity they would have built up in a traditional mortgage.
For example, when the Pennsylvania Attorney General sued a company that did hundreds of rent-to-own contracts in that state, it discovered that only 2% of buyers succeeded in obtaining the deed for the property – signifying that they were now homeowners.
“(Contracts) can be drawn up in a way that makes it almost impossible to succeed,” said Alex Kornya, general counsel for Iowa Legal Aid. “You lose every dollar that you’ve put into that house and the contract seller walks away with a total windfall.”
In Iowa, there have been nearly 3,700 contracts for deed recorded at county offices since 2008, according to figures furnished to the Midwest Newsroom by ATTOM, a provider of mortgage data.
You lose every dollar that you’ve put into that house and the contract seller walks away with a total windfall.
– Alex Kornya, general counsel for Iowa Legal Aid
The numbers were lower in Kansas, Nebraska and Missouri, but figures likely underreport how many of the deals happen in those states because they have few to no laws requiring that these deals be registered at county offices.
Lance Lowenstein, an attorney in Kansas City, Missouri, says …….