Despite Recent Changes In Law, Contracts For Deed Pose Continuing Problem For Poor, Unsophisticated South Texas Homebuyers; Some Landowners Use It To Sell Parcels In Illegal Subdivisions; Housing Advocate Calls It "The Underbelly Of Real Estate"

In Harwood, Texas, PBS NewsHour reports:

• To Fredie McKinney, buying the mobile home seemed like a great idea. It was big enough for McKinney, his wife and his elderly mother. The fenced 8-acre property in Harwood, Texas, was perfect for their dogs and horses. McKinney only had to pay $500 to move in, two years ago, with the understanding that after paying the developer $1,000 a month for 25 years, he’d own the property.
  
  At least, he says, that was the plan. Now the developer is demanding McKinney pay back taxes owed under the contract — money 68-year-old McKinney says he shouldn’t have to pay— and county officials say the entire subdivision may be illegal.
  
  McKinney has a “contract for deed,” a financing arrangement common in some low-income communities that can leave homebuyers in a legal mess. Unlike a mortgage, buyers don’t get title to the property until they’ve completed their last payment. They have to maintain the property and pay property taxes, but they don’t build any equity. They usually don’t get a homeownership tax break, and if they miss a monthly payment they can lose the home and all the money they sank into it.
  
  Texas passed a law last year that will help McKinney and homebuyers like him claim titles to the properties they’re paying for, the latest in a series of reforms. Other states also are adding protections for buyers involved in this archaic form of financing.
  
  Nobody knows how many U.S. homebuyers have entered into contracts for deed. The U.S. Census Bureau’s American Housing Survey pegged the number at 3.5 million in 2009, but hasn’t asked the question since.
  
  In some communities, the contracts may be on the rise. The recession eroded people’s finances and drove banks and credit unions away from risky borrowers. This expanded the market for contracts for deed, rent-to-own plans, and leases with option to purchase — seller-financed deals that don’t require a credit check and sometimes don’t even require a down payment.
  
  “The underbelly of real estate, is what I call it,” said Robert Doggett, an attorney with Texas RioGrande Legal Aid who specializes in housing law.(1)
  
  Major investment firms have bought up distressed properties across the Midwest and South and are using contracts for deed to sell them. After The New York Times reported on the practice in February, New York state regulators subpoenaed two of the firms and the federal Consumer Financial Protection Bureau assigned enforcement lawyers to investigate.
  
  The Poor Man’s Mortgage
  
  Texas Rep. Terry Canales, a Democrat who practices law in a town about an hour’s drive from the Mexican border, said contracts for deed are “a continuing problem” in South Texas.
  
  Along the border, thousands of very poor people live in colonias — unincorporated communities that often lack running water, paved roads and other basic infrastructure. In these mostly Hispanic neighborhoods, contracts for deed have long been a popular way for developers to sell property and for friends and relatives to sell homes to one another.
  
  These contracts are typically signed without help from real estate agents and attorneys and involve buyers who know very little about the law. In colonias and other informal subdivisions, some contracts are handwritten on scraps of paper or not written down at all, according to a 2012 University of Texas at Austin study.

For more, see Here’s why low-income households may gamble with homeownership.

See generally, The Contract for Deed Prevalence Project (A Final Report to the Texas Department of Housing and Community Affairs).

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(1) Texas RioGrande Legal Aid (TRLA) is a non-profit organization that provides free legal services to low-income residents in sixty-eight counties of Southwest Texas, and represents migrant and seasonal farm workers throughout the state of Texas and six southern states: Kentucky, Tennessee, Alabama, Mississippi, Louisiana and Arkansas. In addition, TRLA operates public defender programs in several Southwest Texas counties, representing the poor who are accused of felonies, misdemeanors and juvenile crimes. land contract