Five years ago, Donald Strayer thought he had bought a dream home for his extended family. It was in a pretty spot in the Appalachian foothills of Ohio and could accommodate him and his wife, his daughter’s family, and their horses and goats. And he could actually afford it.
Strayer was turned down from a bank loan because of bad credit – he says it was years ago because of hospital bills. The 58-year-old former forklift driver has a chronic lung disease and lives from a disability. Instead of a regular mortgage, he concluded a so-called real estate contract directly with the seller.
The price was $39,900. For a down payment, he sold his childhood home, which he inherited after his father’s death, “the only thing I had in the whole world”.
For years he paid $350 a month for his new home. And then “one day the sheriff just came,” he says. “It was foreclosed and they wanted to take my property.”
It turns out the seller’s family — to whom Strayer had sent his payments — kept the money rather than pay off the mortgage. This left Strayer a large investment with no equity and no legal title to ownership.
Land contracts and other types of alternative financing have been around for a long time, with roots in the race-based redlining that discouraged black Americans from traditional mortgages. But legal aid experts say they became more common after the Great Recession and housing and rent costs have skyrocketed. They may be the only option for some, but these alternative offerings pose a financial risk to families who have the least to lose.
“For many American families, home ownership has been the single greatest source of wealth over the past century,” says Tara Roche of The Pew Charitable Trusts. “Mortgages are an important step in achieving this financial security.”
People of color and people in rural areas are more likely to take advantage of these risky arrangements
A first of its kind nationally Survey by The Pew Charitable Trusts notes that 36 million Americans — about 20% of all borrowers — have at some point used alternative avenues to finance a home, including 7 million who are currently on such arrangements. Borrowers are mostly low-income, more likely to live in rural areas, and are disproportionately Hispanic and black, reflecting the racial divide in homeownership.
Unlike mortgages, alternative financing is not usually registered with any authority. You don’t start out with a bank or mortgage company, so you’re not subject to the same state or federal regulations.
“In most of our cases, we have handwritten notes that would fail,” says Peggy Lee, an attorney with Southeastern Ohio Legal Services. She says some of her clients have even been tricked into believing a verbal contract is binding, even though they’re not recognized in Ohio.
This leaves borrowers with higher costs and less protection. They can be suddenly evicted without the right to normal foreclosure proceedings. You are excluded from taxes and other homeowner benefits. The legal ambiguity prevented many from claiming any financial relief related to COVID-19 or the moratorium on evictions, resulting in a double whammy for families most likely to suffer from the pandemic.
Another key difference: usually the seller keeps the title deed until the final payment, while the tenant is responsible for maintenance and repairs.
Laura Ziegler / KCUR 89.3
In 2014, Marisela Orozco signed a deal to buy a home from a friend’s colleague in Kansas City, Missouri for $22,000. At the time, she didn’t have a permit to live in the United States, spoke little English, and didn’t understand how title works.
“Walls not finished yet. A small part of the bathroom finished. Not good plumbing,” she said. “But I say, ‘Okay, we’ll fix it’. And I’ll move in with my kids and fix things little by little when I have the money.”
But after 44 months of regular payments and more than $10,000 in home improvements, the owner disappeared and never gave ownership of the home to Orozco.
Repeat offenders engage in “profit-oriented ‘churning'”
Lawyers say they’ve seen more alternative financing options since the 2008 subprime mortgage crisis, when millions lost their homes to foreclosures. Big investors bought the houses in bulk, many of them dilapidated and derelict economically troubled areasthen marketed alternative financing schemes to resell.
Several Attorneys General have filed lawsuits alleging deceptive practices. Pennsylvania recently won a partial victory when a judge ordered 285 apartments to be immediately handed over to people who had signed alternative leases.
Some experts are concerned about the possibility of a further surge in the pandemic as mortgage bailouts and moratoria expire and foreclosures rise.
In rural Ohio, attorney Lee says that with the housing crisis severe, a dilapidated house may be the only thing some people can afford. But she finds it troubling to see customers investing thousands to fix a home, believing it will pay off if the seller never really intends to sell it.
“They just want to shift the burden of repairs by making them think they’re going to build some kind of equity in the house,” she says. “And then, whoops, the first time things go wrong … they’re in an eviction court.”
The Pew survey finds many repeat offenders and calls it “for-profit churn” when an owner initiates the sale of the same home over and over again.
States are beginning to consider more protections for borrowers
Because alternative funding modalities are difficult to track, there is a lack of data on who uses them, where they live and what their experiences are. Pew’s Roche hopes the information in the survey “can help inform policymakers considering policies for alternative home finance borrowers.”
Some states have tried to better protect consumers, and Roche sees a surge in proposed legislation this year.
Sarah Mancini of the National Consumer Law Center wants to at least ensure a home is habitable, the same protections as a renter. And in the event of problems, she says, there should be a procedure more akin to foreclosure so tenants aren’t at risk of sudden eviction.
Additionally, Mancini wishes traditional, smaller mortgages were more available and not as difficult to approve.
“We know there is a racial wealth gap. We know people of color are more likely to experience a bump at some point that may have led to a default,” she says.
Instead of requiring an “improperly high credit score,” lenders should look at a person’s current income and ability to pay.
Steve Vockrodt of Midwest Newsroom and Laura Ziegler of KCUR contributed to this story.