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By Peter L. Cassady

Beckman Weil Shepardson LLC has been working with the Contract Buyers League USA and The Legal Aid Society of Southwest Ohio, LLC on the predatory use of land contracts in Ohio and this article was produced in collaboration with them.

In the aftermath of the financial crisis of 2008, Fannie Mae began selling off some 900,000 foreclosed properties at very low prices.  Since conventional financing sources were no longer interested in these low end properties, the environment was ideal for unscrupulous parties to purchase properties from Fannie Mae and others and then without any improvements “sell” to unsophisticated buyers often for three to five times what they paid using land contracts.  With the tightening of the credit market, communities saw a resurgence in land contracts.  Unaware of the many predatory features of land contracts, those wanting to become home buyers saw land contracts as an opportunity for home ownership.

Unfortunately, land contracts are currently being used in a predatory and abusive manner in our state.  A primary problem with these land contracts is the condition of the property when it is sold under land contract.  Often in the case of the formerly Fannie Mae properties, the property has been vacant for some time and has serious problems.  For example, Harbour Portfolio (which at one point had more than 50 properties in Hamilton County) had purchased a home in 2011 for $9,116 from Fannie Mae on June 10, 2011 and “sold it” for $36,700 thirty-two days later.  According to the buyers, the house had no plumbing (the copper pipes had been stripped), toilets, or appliances.  It had roof leaks and the front door didn’t work.

As has been documented in a series of articles in the New York Times, the Indianapolis Star, and elsewhere this example is unfortunately all too typical.[1]  And when the owners like Harbour can’t find another unsuspecting purchaser to buy, they just abandon the property, leaving the city with unpaid back taxes and the direct and indirect costs associated with an abandoned property.  The situation has caused the City of Cincinnati to file suits against two of the biggest offenders in recent months.

At least two cities in Ohio, Toledo and Lorain, have tried to address the often poor condition of properties sold on land contracts by passing ordinances which attempt to curb the abuses.  The Toledo approach (Toledo Municipal Code Sections 1762.01- 1765.06) requires that prior to conveying a property by land contract, the owner shall apply for and obtain a Certificate of Property Code Compliance.  In Lorain (Municipal Code Section 1539) it is required that the owner obtain a “Certificate of Inspection” from the Buildings Department.  How well these ordinances are working is apparently a matter of some debate and it seems that for such a widespread problem a state-wide solution would be appropriate.

In its April 2017 Policy Recommendations for a Strong State Law on Land Contracts, the National Consumer Law Center aptly sums up the problem of land contracts:

Buyers in land contracts are stuck in a no man’s land: the contracts provide them none of the protections of home ownership and none of the legal rights that a tenant would have. This situation allows investors in land contracts to reap a significant windfall at the expense of struggling buyers. In order to change the fundamental unfairness of these transactions, legislation must ensure that until the buyers have all of the rights of home ownership, they should have all of the protections provided to tenants.[2]

Ohio’s current law governing land contracts does not prevent the worst abuses that are rampant in our communities.  Home buyers in land contracts too often find their dreams of home ownership turning into nightmares as they struggle to make unanticipated and unaffordable repairs on a property titled in someone else’s name.  And no matter how much they have sunk into repairs, a single missed payment may result in a quick eviction from the property if the homeowner has not made sufficient payment on the contract.  Communities find the sellers of the land contract to be unresponsive to concerns about the property’s condition and unwilling to act as a responsible owner.

The Contract Buyers League USA and the Legal Aid Society of Southwest Ohio, LLC have researched the problem and believe that several changes to Ohio’s law as recommended by the National Consumer Law Center’s April 2017 policy guide could stop predatory land contracts in Ohio.

  1. Require that the seller in a land contract remain responsible for repairs until a deed is conveyed to the buyer.

Land contracts promise homeownership yet offer none of the benefits.  Buyers in land contract sink thousands of dollars into repairs, yet are treated as a tenant and promptly evicted if one payment is missed.  This is one of the most predatory aspects of land contracts and if changed would prevent much of the current abuses of land contracts in our communities.

  1. Require that the seller resolve all issues with outstanding liens, code violations, and property taxes at the time of sale.

Often the property involved in the land contract sale has significant issues that the buyer cannot afford to address and that threaten his or her ability to stay in the property.  Sellers must assure that liens, code violations and property tax issues are addressed at sale.

  1. Establish a reasonable statutory interest rate cap for land contracts.

Other states have already done this, thereby ensuring that land contracts are not used to charge buyers usurious interest rates that guarantee failure.  While the interest rate would be more than the current market index rate, it should not be so high that it is predatory.

  1. Require an independent appraisal.

Sellers in land contracts often fail to disclose known health and housing code violations of the properties and often charge far more than the property is worth.  The sellers of land contracts sometimes discourage the buyers from obtaining an appraisal.  Requiring the seller to obtain an independent appraisal would ensure that buyers are provided with information to determine what is a fair and reasonable price for the property.

  1. If a buyer defaults on a land contract, there should be no forfeitures of repairs made or taxes paid by the buyer

Land contracts allow a seller to declare upon any default, that the buyer has forfeited the amounts spent on repairs or taxes.  This results in an unfair and substantial windfall for the seller.  Various options exist to address this such as requiring that any amounts expended on the downpayment, plus repairs and property taxes be returned to the buyer

  1. Impose significant penalties on the seller for non-compliance.

Buyers should have the right to enforce mandatory provisions against sellers to ensure their compliance.  This should provide the ability to obtain damages and attorneys fees.

We would welcome the opportunity to discuss further the abusive land contract practices occurring in our state and solutions to stop them from further harming Ohioans and our communities.[3]

 

 

[1] For example, see Alexandra Stevenson & Matthew Goldstein, Seller-Financed Deals Are Putting Poor People in Lead-Tainted Homes, New York Times (Dec. 26, 2016); Tim Evans and  Madeline Buckley, ‘Homeownership was a mirage’: How home buyers say their American dream became a nightmare, Indianapolis Star (June 25, 2017).

[2] The policy guide is available at http://www.nclc.org/images/pdf/foreclosure_mortgage/predatory_mortgage_lending/ib-land-contracts-policy-recs.pdf

[3] One of our attorneys, Peter L. Cassady, worked with the original Contract Buyers League in Chicago during the late 1960’s and early 1970’s.  That organization and its significant accomplishments are discussed in a very recent article which can be found at https://urldefense.proofpoint.com/v2/url?u=http-3A__prospect.org_article_private-2Dequity-2Dnew-2Dneighborhood-2Dloan-2Dsharks-2D0&d=DQIFAg&c=euGZstcaTDllvimEN8b7jXrwqOf-v5A_CdpgnVfiiMM&r=DcLgdK-5y018JSi2cbuFZrJ7qBjHJOqkDZimsfrlyqw&m=MTrQuBIiL7u7VUhutgUSQjwnju5d6mHuQwnIuAoemjY&s=02o-V6tPA-pHTlDYbI0-zCKHm3RKVRVs6aDfGEjv2kM&e