A Robbinsdale woman faced foreclosure even though she had faithfully made payments. She had purchased her house under a contract-for-deed arrangement, but the seller went bankrupt and didn't pay his lender. So the woman lost her home, the payments she had made and the $25,000 she had put down on the property.
That example -- and dozens of others across the metro area -- bring renewed power to the "buyer beware'' adage. And they demonstrate why more must be done to protect consumers from shady contract-for-deed real-estate deals.
In a Star Tribune investigation published earlier this week, reporter Jeffrey Meitrodt tracked hundreds of questionable property transactions. In examining 1,330 deals over the past five years, he found that many of the homes were sold for highly inflated prices, with high interest rates and other terms that almost guaranteed that buyers would default. Hundreds of deals occurred without housing inspections that would have revealed code violations and safety hazards.
Contract sales typically occur as private agreements with no bank, appraisals or lawyers involved. The seller acts as the bank by financing the sale and collecting payments. If the seller still has a mortgage on the property, then he or she must continue to make the payments.
Traditional property transactions take months to complete and involve title searches, credit checks, truth-in-housing appraisals and inspections. But contract sales can be done with little or no oversight.
In fairness, not all of these transactions are bad deals. Historically, they have been used between friends, relatives, neighbors, or longtime renters and landlords to help transfer home ownership. And the Greater Metropolitan Housing Corp. nonprofit has successfully used the process to help lower-income people successfully buy homes and stabilize struggling neighborhoods.
Yet in recent years, these agreements have morphed into big business for some landlords and real-estate investors. In Hennepin and Ramsey counties, registered contract sales grew from 539 in 2007 to 841 in 2012 -- not including transactions that were never formally registered.
Housing advocates call the deceptive contract deals yet another form of predatory lending that take advantage of lower-income, less-experienced buyers and renters. Ron Elwood, supervising attorney with the Minnesota Legal Services Advocacy Project, said that when the mortgage crisis prompted a government crackdown and tighter lending, some unscrupulous landlords and sellers moved into the contract-for-deed business.
Elwood said some of his clients thought they were signing new rental forms and learned later that they were contracts used to help the building owners "get around'' city housing code requirements for rental properties.
Loopholes like that should be closed. People who enter into these contracts need clear information about what they're signing. That's why the state should provide more protection for buyers.
Legal aid and some city and county housing departments rightly want more oversight for those who do multiple contract-for-deed sales. They recommend making buyers and sellers responsible for recording the transactions; requiring sellers to disclose property problems to buyers; offering a recourse process for buyers, and mandating more time for both parties to consider the deal.
Similar legislation has been proposed in the past but never made it out of committee. Now that the numbers of such deals -- and abuses -- have grown, it's time for lawmakers to get serious.