Responsible, people-focused, Contract for Deeds

December 31, 2012 by · 1 Comment 

A couple of weeks back, there were several of articles and editorials speaking to many of the potential pitfalls and scams that await unsuspecting Contract for Deed buyers http://www.startribune.com/opinion/editorials/186544251.html.  As many households have credit issues and mortgage lending has tightened up underwriting criteria, it’s become increasingly difficult for households, especially low-income households, to achieve homeownership.  When the seller (in many cases an investor) doesn’t need to be repaid for the entire cost of a home they may opt to sell the home via a Contract for Deed.  A Contract for Deed is considered a home sale, but the buyer doesn’t receieve title of the property until the terms of the contract are satisfied.  That typically means that the buyer will need to pay off the balance of the principle due on the contract prior to a specific date (2, 3, 5, 10 years). 

If the buyer is unable to obtain take-out financing (a mortgage, personal loan, cash, etc.), the seller can cancel the contract and evict the homeowner.  The Star Tribune articles and editorials identified several stories where households had been taken advantage of and ultimately lost their homes.  The article also noted that there are more responsible Contract for Deeds in the community.  The City of Lakes Community Land Trust (CLCLT) is collaborating with Urban Homeworks (www.urbanhomeworks.org) on a Contract for Deed program  called Project: Reclaim.  Project: Reclaim not only responsibly assists households into homeownership, but supports homeowners in repairing their credit so that they will be able to obtain a mortgage in a reasonable amount of time.  Over the past three years, we’ve been able to assist 16 households into homeownership via Project: Reclaim and anticipate assisting another 20 over the next 18 months.  Just last week we celebrated the first “refinance” out of the Contract for Deed into a mortgage by one of the homeowners.  It was great to see how that household was able to improve their credit and achive this goal in such a short period of time.

We’ve learned a ton about Contract for Deeds over the past few years and understand that some added protections may need to be put in place to protect Contract for Deed buyers, but believe it is necessary to make sure that we also model good examples of Contract for Deeds.  When asked what differentiates the Project: Reclaim Contract for Deed from other Contract for  Deeds, I mention these things:

1.  We provide a significant incentive at “refinance” for Project: Reclaim buyers.  Let’s say that that a household purchases the home for $120,000 via our Contract for Deed.  Once they’ve repaired their credit and are able to get a mortgage, the amount they will need to get a mortgage for will be $90,000 at the most as we are providing at least a $30,000 write-down at that time.  That write-down should hopefully continue to ensure affordable payments for the household.

2.  We tie our Project: Reclaim Contract for Deed to a Credit Enhancement plan that the homebuyer and Credit Counselor develop prior to executing the Contract for Deed.  This is essentially the “road map” the buyer needs to follow to pay off debt, old judgements, car loans, etc. in order to obtain a mortgage.  Not only are we able to assist someone in buying a home, we are also increasing credit scores.  This decreases other costs in their lives like insurance, car payments, and other leases.

3.  In the event (it hasn’t happened yet, but if it does) a homeowner isn’t going to make it as a Project: Reclaim homeowner, we are able to provide them with a soft landing in the form of affordable rental housing.  Urban Homeworks also maintains over 100 affordable rental units, which ensures households will still have affordable options even if homeownership isn’t the best fit for them.

The above items:  Incentive, Credit Enhancement, and Soft Landing should be inherent components of any responsble Contract for Deed program.  It’s more than a transaction, it’s about creating one or more springboards in which households can utilize to create a better place for themselves.

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Comments

One Response to “Responsible, people-focused, Contract for Deeds”
  1. K brogan says:

    Thanks for this article. It is clear taht there are people who will take advantage of others who are less knowledgeable, people who will skirt the law to their advantage to make a few dollars, people are just plain self-serving. BUT Contracts for Deed are essential tools in the real estate business and in the right hands with the right parties it can be a win win for the buyer, seller, and the community. This article is important – please share with all those you believe will benefit from such a finanical opportunity or from having good knowledge about the importance of Contracts for Deed.


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