Thursday, February 18, 2016

Contract For Deed: Handy, Informal Way For Sleazy Investors To Trap Novice, Low-Income, Crappy-Credit Homebuyers w/ Long Term Contracts For Dilapidated Homes; Typically Avoids Standard Formalities (Appraisal, Inspection, Title Search, Attorney Review) Of Conventional Sales; No Different From 'Buy-Here, Pay-Here' Used Car Lots; 'White Picket Fence' Dreams Used Against Victims, Says One Lawyer

In Corpus Christi, Texas, the Corpus Christi Caller-Times reports:
  • Arturo Rodriguez wished for a house of his own for most of his life. When he found someone who would sell him one, he willingly stepped into a trap.

    "I wanted a house," he said. "My credit was bad. This was all I could afford. It was falling apart."

    Rodriguez and hundreds of others entered into a type of legal arrangement called a contract-for-deed.(1) House dwellers make payments, pay taxes and insurance on a house as if they own it, but they don't receive the property deed until it is paid off. Equity doesn't accrue. Interest rates are high, a home inspection and appraisal aren't conducted and repairs are the responsibility of the residents.

    Seven years ago, a storm damaged Rodriguez's roof and water soaked through to his ceiling tiles. He eventually made repairs himself, spending at least $10,000 to $12,000.

    He already has paid for the house's $50,000 sale price through his monthly payments, but because of the high interest rate, his deed wont mature for another eight years. By that time, he could have bought his house twice. His monthly payments that were $470 are now $620.

    The questionable sales become a public concern when the houses are falling apart, trash accumulates in yards and weeds grow wild. The city has to follow a legal maze to find out who is accountable.

    It's a problem that puzzles city leaders, plagues neighborhoods and makes a living for a small group of people -- owners who have a convenient, legal exit from maintaining the property.

    Those who sell and rent the houses say they're giving people with bad credit and low incomes an opportunity to own a home they wouldn't have otherwise. The contracts are legal, and people should know what they're getting into, they said.

    Despite legal reforms that now allow those such as Rodriguez to modify contract-for-deeds to their advantage, the local agency that offers free legal assistance to the needy couldn't convince anyone to file the paperwork.

    While homeowners can sell their houses and renters can walk away from the dilapidated properties when their lease expires, this group of people has few options.

    Because it's often those with low or middle incomes and bad credit who sign up, repairs often lag. When absentee landlords sell groups of houses under these contracts, neighborhoods take a turn for the worse.

    Councilman Kevin Kieschnick, who represents a district that includes many rundown neighborhoods where renters entered such agreements, asked city officials to develop a plan to tackle the problem. But the contract agreements are legal, not always abused and difficult for the city to track.

    "These people are being taken advantage of," he said. "This is predatory lending at its worst. There are holes in these peoples floors."

    The agreements aren't all scams, but many are, said Darrell W. Cook, a Dallas-based real estate contract attorney.

    "They can be legitimate, but they are the perfect way to get scammed," he said. "You're someone who can't qualify. You think it's a lot better than leasing the property. Its really not anything different from a buy-here, pay-here auto lot. They're assuming you're going to fail. It's using their dream of a white picket fence against them."

    Jacqueline Capriles said she didn't realize what she was getting into when she bought her Northside home last March. She wanted an escape from rising rent at her Flour Bluff apartment. A friend recommended her to Ralph Shepard, who with his wife owns more than 70 moderately priced houses on the Northside and central area of the city.

    Her agreement isn't a contract-for-deed, but it is an owner-financed house that she believes is a rent-to-own agreement. "Stupid me, I signed that contract," she said. "The house is basically falling apart."

    Capriles' 30-year contract ties her to $650 monthly payments for a house that is appraised at $63,000. The interest rate is 12 percent, twice what many homeowners pay.

    When she moved her furniture into the front bedroom, an heirloom dresser started sinking through the floor. Her partner, Melissa Bolten, fell through a soft spot in the bedroom floor. The walls started cracking. She learned that holes in the walls were covered by a piece of stick-on tile. Every doorway is slanted. The gap between the porch steps and the house floor is wide enough to stick a finger through.

    The floor tilts in various directions. Soup cans roll downhill from one side of the kitchen to the other.

    Capriles said Shepard told her he was fixing it up. Her contract says otherwise. The house was sold as-is, without an inspection. "I try to fix it a little bit here and there," she said. "It's going to cost more than I ever make. I'm pretty much stuck here. If a real good wind would come along, it would be gone."

    Shepard tells a different story. Buyers should know what they're getting into, he said. "I tell them to check it out," he said. "I say, 'Take people over. Have an inspection. It's as-is." He told Capriles they could leave the house behind soon after they moved in and began complaining, he said. They didn't.

    He's made a living buying foreclosed and dilapidated houses and selling them on owner-financed contracts. Although he said he hasn't done a contract-for-deed in several years, he finances the houses himself. Buyers, many with bad credit scores, pay him directly. Capriles signed the contract thinking she was renting to own, she said.

    Shepard says the houses were sold outright but sees many buyers abandon the homes when they can't make payments. He then tries to sell them again.

    He said the legal arrangements with his buyers allow them to sell the house. In more than 15 years, his name is attached to more than 175 sales registered in the Nueces County Clerk's system. He estimated about 20 to 25 people sold their houses.

    "Trying to sell their house doesn't even enter into their mind," he said. "They might owe me three or four months of payments. They just walk away."

    That leaves Shepard with the cleanup bill. "Sometimes, it will look like a bomb went off inside," he said. "They leave all their dirty clothes. The pick up and go. It turns into my responsibility again, and I deal with it."

    Shepard said he would like the city to focus its enforcement on tenants. "When they go after the landowner, those people realize they can just move out," he said.

    The city doesn't have a grasp on how widespread the problem is but is beginning to evaluate it one neighborhood at a time, beginning with the Hillcrest neighborhood in Kieschnick's district.

    Barry Wolfson, whose family company leases homes in Hillcrest, said he thinks his rental houses fill a void for those who can't afford to rent in newer areas of town and don't qualify for public assistance. His company rents homes and has never sold homes on contract-for-deed.

    Several of Wolfon's shotgun-style houses have splintered siding, dirt driveways and rolled-on roofs.

    "I won't deny some of the houses need some tender loving care," he said. "Our renters are paying well below market. Some people pay tithes to church. We're even doing something better than that by helping out the poorest sects of society."

    In the Hillcrest area, which is bordered by the Port of Corpus Christi, refineries and other heavy industrial development, only 18 percent of homes are owner-occupied. Many landlords there are what Kieschnick considers slumlords. They lock renters into 15-year, 20-year and 30-year contracts, offer no help maintaining the houses and are difficult to pin down.

    Any enforcement action against the landlords could displace residents who have spent thousands on homes they thought they were buying.

    It's a dilemma that attorney Carlos Aguinaga, the regional director of Texas Rio Grande Legal Aid, faces often. The organization, with offices in the Nueces County Courthouse, offers free legal assistance to people with low incomes.

    People who have problems with sellers in rent-to-own contracts or their landlords have few options, he said. "I tell them, 'We can go after the slumlord, but you'll be out of a house,'" he said.

    Those buyers who have already scraped together enough money for deposits, payments and taxes rarely can afford to move. When the city tries to address problems at those crumbling houses, it's snagged in a legal maze trying to find out who is responsible.

    When houses fall into disrepair and violate city codes, it can be difficult for the city to determine who needs to pay.

    The seller is listed as the owner on property tax records, but the contract with the buyer says the owner isn't responsible for upkeep. The buyer could likewise say he doesn't own the house because he doesn't have the deed.

    Mayor Joe Adame, who owns a commercial real estate firm, said the landlords need to be held accountable. He hopes to identify major land owners who lease or sell problem properties and reach out to them.

    He supports a buyout for homes near the industrial corridor, a project that would pay residents to abandon their homes, tear them down and convert the area to green space. It could take years and require millions of dollars.

    In the meantime, he's also asking the city to study the problem.

    "We need to find them a way out," he said. "They're in checkmate. They can't move out and can't take care of the houses there."
Source: Residents stuck in contract-for-deed trap (No apparent fix for many homes).
(1) A 'contract for deed' (sometimes known as a “land contract,” "agreement for deed," "land installment contract" or an “installment sale agreement”) is a contract between a seller and buyer of real property in which the seller provides financing to buyer to purchase the property for an agreed-upon purchase price and the buyer repays the loan in installments.

Under such a contract, the seller retains the legal title to the property, while permitting the buyer to take possession of it for most purposes other than legal ownership. The sale price is typically paid in periodic installments, often with a balloon payment at the end to make the time length of payments shorter than a corresponding fully amortized loan without a final balloon payment. When the full purchase price has been paid including any interest, the seller is obligated to convey legal title to the property to the buyer. An initial down payment from the buyer to the seller is usually also required by such a contract. The legal status of such contracts varies from region to region. (Reference: Wikipedia).

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