A year after moving into her white brick house in suburban Robbinsdale, Jennifer Gaines got a letter that turned her life upside down.

She was facing foreclosure -- even though she was current on her monthly payments. She was also about to lose the $25,000 she paid on the home because the seller, who was responsible for paying the mortgage, had gone bankrupt.

Gaines bought the property through an unusual, but increasingly common, option known as "contract for deed." Unlike a traditional home sale, the transactions typically take place with no bank, no Realtor, no appraisal -- and little government oversight.

Instead, the seller finances the sale and then collects monthly payments, much like a landlord.

Across the Twin Cities, many homes sold through contract for deed have been beset by inflated prices, high interest rates and other terms that almost guarantee the buyer will default, according to a Star Tribune investigation of 1,330 such deals dating back to 2007.

In hundreds of cases, records show, sellers failed to provide mandated home inspections that would have revealed code violations and safety hazards. Some buyers said they were misled about outstanding debts attached to the properties. Others thought they were signing a lease.

"This is the first place that ever felt like home to me, and now I have to move," Gaines said. "I was so naive."

In the aftermath of the housing market crash, contract-for-deed sales in the metro area have soared more than 50 percent in the past five years, as families with low income or bad credit are lured by the promise of homeownership.

"There is a lot of abuse out there," said Connie Sandberg, who oversees St. Paul's housing sale inspections. "People are being victimized."

Regulators in several cities said they are alarmed by the Star Tribune's findings and frustrated by their inability to do more to protect buyers. Local officials are vowing to push state legislators this year to require greater disclosure from sellers.

"They are clearly taking advantage of a certain segment of the population that needs housing," said Kellie Jones, manager of Minneapolis' problem properties unit.

The purchase price can be twice what the property is worth, records show. On average, contract-for-deed sales were about 10 percent above the estimated market value as set by county assessors.

To get a handle on the growing business, Minneapolis officials recently began their own examination of contract sales. They believe many rental property owners are using contracts for deed as a way to avoid maintenance rules, shifting the cost of expensive repairs onto their buyers. Indeed, hundreds of contract sales in the Twin Cities involve former rental properties, many with a history of problems.

"People are signing a contract for deed and thinking it is a synonym for a lease, and they don't recognize the seriousness of what they are agreeing to," said Henry Reimer, assistant director of regulatory services for Minneapolis.

Many properties were sold again after buyers defaulted, allowing sellers to pocket down payments ranging from $1,000 to $25,000, plus any monthly payments already collected.

Investor Ron Folger sold 16 rental properties on contract for deed after losing his rental license in Minneapolis in 2011. During a recent interview, he said a contract for deed allows him to earn money on his properties without the meddling of city government.

"I figured out how to beat the city at their own game."

Disclosure problems

In at least 370 cases, the sellers in contracts for deed failed to provide mandatory inspections that would detail existing code violations, such as faulty wiring or other problems.

Folger did not provide an inspection in 11 of 16 sales.

Many buyers said they didn't even know they were entitled to them. Sylvia Dominguez bought a house in late 2011 from Folger, only to find out that her home had a broken furnace, malfunctioning dishwasher and leaking bathroom.

"I feel like a fool," Dominguez said.

Folger, who obtained a Realtor's license, said he didn't know he was required to provide disclosure reports. "I want to make money, but I don't want to do it on the blood of other people," he said.

Though the evaluations are required for all real estate sales in many cities, they are especially critical in contract-for-deed sales because buyers do not usually hire an inspector. Sellers are supposed to obtain the reports from a licensed evaluator and conspicuously post them on the property.

City officials said they are skeptical that any seller of rental property is unaware of the disclosure requirements. "They are just trying to dump a problem on somebody else," Jones said. "They know what the rules are."

But even buyers who see such reports are sometimes surprised once they move into their new home.

In St. Paul, Vadym Klyatskyy knew he was buying a fixer-upper when he made a $10,000 down payment on his $59,900 duplex on Magnolia Avenue, a former rental owned by Bohlen Properties. Bohlen provided a report listing 81 deficiencies, ranging from sloping floors to cracked concrete. But Klyatskyy didn't expect to spend $30,000 to make the house livable.

"We kind of regretted jumping into it too fast," said Klyatskyy, a Ukrainian immigrant who needed a place quickly for his family, including his mother and grandmother. "But for the price -- and the square footage -- we are happy."

Company co-owner Tom Bohlen said he heavily discounted the purchase price to offset the costs. Ramsey County's appraised value of the duplex is $115,600, almost twice what Klyatskyy agreed to pay.

"I was not pressuring them in the least," Bohlen said.

In at least three other contract sales, Tom Bohlen and his wife, Becky, failed to provide the required disclosures to their buyers, records show.

"I'm sorry if we missed a few ... reports," Becky Bohlen said.

Officials in Minneapolis and St. Paul said they don't check for compliance on disclosure reports. Instead, they respond to complaints. In the past eight years, however, Minneapolis has had just one complaint.

Moreover, the penalties are not much of a deterrent. In Minneapolis, the most a seller would be fined for failing to provide a disclosure report is about $200, Reimer said.

Under state law, buyers have no right to sue if sellers fail to provide required disclosures, said Luke Grundman, a lawyer with Mid-Minnesota Legal Assistance who specializes in contract-for-deed sales.

"It's kind of bizarre to say there is no penalty for that," Grundman said. "But if the city doesn't enforce it, no one can."

'No one wins'

Housing experts believe the actual number of contracts for deed is vastly underestimated across the metro area because sellers are not required to record the transactions. That responsibility falls on the buyers, most of whom have little real estate experience.

Still, the number of contract sales recorded in Hennepin and Ramsey counties is climbing -- up 56 percent between 2007 and 2012. Altogether, more than 4,000 properties were sold on contract for deed since 2007, including undeveloped land, commercial buildings and single-family homes.

St. Paul investor Jeffrey DeLisle, whose family has been using contracts for deed to sell property since the 1970s, estimates that half of the deals done by his company are not recorded by the buyer.

To improve his buyers' chances of holding onto their property, DeLisle typically gives them five to 10 years to make their balloon payment, far longer than most private sellers. Down payments have been as low as $1.

"No one wins if the people end up losing their home," DeLisle said.

Despite those terms, DeLisle said few of his buyers have been able to buy out the family's interest when their contracts expired, though he has given some buyers an extension. One problem could be the purchase price. On average, DeLisle charges a 65 percent premium over estimated market value, according to county records. DeLisle said the prices reflect "market conditions" and the company's success in negotiating down the assessed tax value of its properties.

By comparison, the Greater Metropolitan Housing Corp. -- a nonprofit that uses contract sales as a way to stabilize troubled neighborhoods -- sold 26 properties for an average markup of 1.2 percent.

"If you are overpricing your property, you are trying to pull as much cash out of it as you can in the short-term," said Gary Beatty, who oversees the contract for deed program for GMHC.

The organization is one of 10 groups or individuals that accounted for a quarter of the 1,330 residential contract sales reviewed by the Star Tribune. That list included another nonprofit as well as landlords such as Folger. Another 238 transactions involved companies or individual investors who recorded at least two contract sales in the past 10 years. The rest were individual transactions or corporate sales.

Like other advocates of affordable housing, Beatty believes that contract sales should more closely resemble a traditional housing transaction, which is why the group's deals include independent appraisals. Buyers are screened to make sure they can afford the homes. Also, the nonprofit group makes sure monthly payments are reported to credit agencies, which helps buyers improve their chance of refinancing when balloon payments come due.

Jon Shanahan, a restaurant manager who bought a $123,000 home in Minneapolis from GMHC in 2009, qualified for a bank loan 15 months later that let him pay off the contract.

"The help I got from them was phenomenal," Shanahan said. "They really changed my life."

For rent or for sale?

In the past five years, nobody sold more former rental properties on contracts for deed in the Twin Cities than Brooklyn Park homebuilder Leslie Reynolds.

But Reynolds' online advertisements continue to promote the properties as rentals, not homes for sale. Reynolds acknowledged the bait-and-switch tactic during a recent interview.

"We put them in 'houses for sale' and we never got a call," Reynolds said.

Several people who responded to the ads said they didn't find out Reynolds wanted to sell them a home until they walked into his office to sign what they thought was a lease. By then, the buyers said, they had already toured the properties and agreed on the size of the monthly payment, not realizing other financial obligations would follow.

Natasha Osborn said she didn't know how much she agreed to pay for her property until she moved in and the contract arrived in the mail. She thought she was renting a house for $900 a month with an option to buy. Instead, she must pay $145,000 by 2014.

"I kind of lost my mind," Osborne said. "My house is not worth $145,000."

Karla Stewart-Mitchell knew she was purchasing a house from Reynolds for $210,000 in 2011, but she thought she would be finished paying for it within three years. As it turns out, she would still owe $205,800. Like most of Reynolds' deals, her payments covered mostly the interest charged by the seller.

"He definitely took advantage of me," said Stewart-Mitchell, who was forced to move when the property was destroyed in a fire last year.

Responding to complaints, Reynolds said nobody was tricked into a contract for deed. He said he makes sure his buyers understand their rights and responsibilities. "They don't really realize they can afford to buy a house, and we convince them they can," he said.

So far, not one of Reynolds' 160 buyers has been able to refinance their deals, which typically require six-figure balloon payments in three years. Many walked away, allowing Reynolds to retain ownership. In the past three years, 40 of Reynolds' former rental properties have sold more than once through contract for deed.

On average, Reynolds sold his properties for 40 percent more than the county's assessed value, records show. If those properties don't significantly appreciate within three years, many of Reynolds buyers won't be able to refinance and buy out his interest because banks won't lend for more than a property's market appraisal.

Reynolds agreed that his deals are overpriced by today's standards, but he said he and his buyers are betting that values will climb.

"I'm in the business of turning these houses and making a profit on them," Reynolds said. "The choice is on the buyer, not me. I am putting a price on it, and they are saying yes or no."

Many of Reynolds' buyers went to Brooklyn Park officials for help, said Curt Raymond, who handles enforcement for the city's building department. City officials believed Reynolds may have violated laws against deceptive marketing, so they contacted state, local and federal prosecutors, Raymond said.

"We've run this past everybody we can -- including the FBI -- to see if there is something predatory here, but we couldn't find anything criminal to go after him on," Raymond said. "There is nothing much we can do."

Reynolds said his buyers "all seem to leave happy" after signing their contracts.

"Maybe they didn't know a thing about what we were talking to them about. Maybe they just trusted us," Reynolds said. "But they sure acted like they knew what was going on. ... We don't force anybody to do anything."

Still, Reynolds acknowledged that his high-volume operation violated a state law that bars people from selling five or more properties per year without a real estate license. In November, Reynolds agreed to pay a $20,000 fine and hold off on additional sales until obtaining a license. He said he was unaware of the limit but agreed to the fine because he was "guilty."

Landlord 'beat the city'

At Reggie Malone's Minneapolis home, which was condemned by the city for health hazards in 2011, the basement leaks when it rains. Mold creeps across a freshly painted wall. And the bedbugs are so bad the family has ripped up carpet and abandoned rooms to escape them.

Malone said he never would have agreed to purchase the house in 2012 if the seller, Ron Folger, hadn't promised to fix it up. Malone figures it will cost at least $5,000 to make the house habitable, and he refuses to make his monthly payments until Folger does the work.

"I feel like he betrayed us," Malone said.

Folger's rental license was revoked in Minneapolis after his 18 properties racked up 368 violations in three years. He denies cheating anyone when he sold some of his rentals using contracts for deed.

In Malone's case, Folger said he knows the house needs repairs, but he said he won't work on it because Malone refuses to make his monthly payments. "I really like them," Folger said. "But I can't keep going on getting nothing."

Not all have been unhappy during their dealings with Folger. Two of his buyers said they are satisfied with their deals, noting the monthly payments are less than what they used to spend on rent.

"A lot of people threw him under the bus, but I'm not going to do that," said Laprishia Powell, who is grateful that Folger is willing to split the cost of replacing her broken stove. "He has been straightforward with everything."

When it comes to repairs, Folger said his buyers are usually more reasonable than the city, which forced him to spend about $50,000 on issues he frequently challenged. For some of his contract buyers, Folger said he has replaced appliances and cleared clogged pipes for free. In other cases, he has charged a fee, such as $150 for replacing a broken window.

"I don't have to do it, because I am selling the house as-is," Folger said. "Anything I do comes out of the goodness of my heart."

If they don't like it, Folger said, they can move.

"I have nothing to lose, because I can sell it to someone else."

Jeffrey Meitrodt • 612-673-4132