Housing advocates seek consumer protections in land contracts

For prospective homebuyers who can’t qualify for a traditional mortgage, a land contract may be a financing option they consider as a way to pursue their ownership dream.

But signing a land contract carries risks for buyers that they wouldn’t encounter with conventional alternatives.

The Fair Housing Center of Central Indiana highlights some of those risks and calls for stronger legislation and enforcement of existing state and federal laws in a new report “Land Contracts: The Promise and Perils of Alternative Home Financing.”

In the report, the fair housing center investigated disparities in access to homeownership and looked at what it described as “predatory practices” linked to land contracts.

“Land contracts, notorious in the age of redlining for exploiting Black residents, have again reared their heads, this time with deceptive practices and predatory terms through heavy targeting of Hispanic home seekers in Marion County,” the report states in its executive summary.

The local report was cited in the federal Consumer Financial Protection Bureau’s “Report on Contract for Deed Lending,” which was issued in August.

Both reports point out that contracts for deed loans, also known as land contracts, were long marketed to Black borrowers from the 1930s well into the 1960s.

When Black borrowers were largely barred from obtaining more affordable loans insured by the Federal Housing Administration, sellers marketed contracts for deed to Black borrowers to purchase homes at inflated prices.

The federal agency acknowledged that contracts for deed loans continue to be marketed to “traditionally underserved and underinvested communities.”

The local fair housing center found that more than 600 land contracts were recorded in Marion County between 2018 and 2023, with a steep increase in from 2021 onward. The organization reported that about 85% of the more than 2,000 total county households under land contracts went to homebuyers with “Hispanic-sounding names.”

The organization believes Hispanic consumers are being targeted by land contract providers, with those consumers possibly being more likely to seek out land contracts due to challenges building credit or being undocumented and ineligible for traditional mortgage loans.

Amy Nelson, the center’s executive director, said that she believes there were a lot of land contracts being done in Marion County that the center was not aware of, due to a lack of oversight and laws that require mandatory recording of those contracts.

“The numbers may be significantly higher than we can imagine,” Nelson said.

There have been several bills introduced in the Indiana General Assembly that have attempted to address some of the concerns raised about land contracts.

Rep. Ed Clere, R-New Albany, said he has a lot of professional experience with the issue of land contracts.

He’s authored or coauthored four land contract-related bills since 2019. He’s also been a licensed real estate broker for 24 years.

He said none of the findings in the fair housing center’s report were surprising to him.

While Clere stressed that there are times and situations where a land contract between an informed buyer and seller is appropriate and works out well, he has also seen too many cases where there is a significant imbalance between the parties in terms of their understanding of a contract.

“I’ve certainly seen some situations that are very troubling, in line with the report,” Clere said.

Report findings

The federal Consumer Financial Protection Bureau also issued an advisory opinion with its August report, where it affirmed that land contracts must comply with longstanding federal mortgage protections.

The agency described the contracts as agreements where the seller agrees to turn over a home’s deed only after the buyer completes a series of payments.

“The deals often have little oversight, and investment groups and other sellers can set a series of traps that leave buyers in unlivable homes, on the hook for tax liens and expensive repairs, and at risk of losing their down payments and homes,” the federal agency said.

The advisory opinion was released in conjunction with a field hearing in St. Paul, Minnesota, where the federal agency reported contract for deed loans had become increasingly prevalent in the Twin Cities’ Somali Muslim community.

“The CFPB has found that investors are targeting people of faith with predatory mortgage products that set the borrower up to fail,” agency Director Rohit Chopra said in a news release. “The government is taking action to ensure that these products do not turn the dream of homeownership into a nightmare.”

The local fair housing center report found that four companies produced about 41% of all recorded land contracts in Marion County.

Most of those contracts are located in census tracts with a majority of residents of color and in low-to-moderate income census tracts, according to the fair housing center.

The organization reviewed the text of more than 40 Marion County recorded land contracts and documented concerns it had with the contracts’ lack of access to home equity and property title, high interest rates, default terms that allow the cancellation of the contract and eviction of the resident without notice, and the back payment of taxes.

Those contracts also did not appear to follow the requirements of the Truth in Lending Act.

“The contracts that we have reviewed are not built for people to be successful,” Nelson said.

Land contract concerns raised in other parts of state

While the fair housing center’s report focuses on Marion County, the land contract issues in Central Indiana are also being seen around the state.

Clere said he’s seen examples of land contract issues like those mentioned in the report since he started working in real estate.

One typical situation he’s seen is someone buys a land contract in July, they don’t have a home inspection done, and then October rolls around and they turn on the home’s furnace for the first time.

If the furnace doesn’t work, the buyer calls the contract seller, who tells them they should buy a new furnace.

This is opposed to a standard landlord/tenant relationship, where the landlord would be responsible for replacing the furnace.

Clere said his focus has been on consumer protection, including establishing disclosure requirements and trying to increase the likelihood that contract buyers are able to make an informed decision.

“I’m not interested in prohibiting land contracts; rather, my interest is in trying to make sure consumers have adequate information,” Clere said.

Chris Baumgartner, managing attorney at Indiana Legal Services’ Fort Wayne office, said he definitely sees some of the same land contract issues in his area that were cited in the fair housing center report.

Baumgartner said a common problem his organization encounters with clients is land contract sellers just trying to make buyers move out, often by issuing a notice to vacate and leaving the buyers with the mistaken impression that they have no choice but to abandon the home. Another complication is that small claims courts don’t have jurisdiction over land contracts.

“The buyer often doesn’t understand that or know that unless they get an attorney,” Baumgartner said.

Other issues Baumgartner has sometimes seen with land contract cases involve buyers having to pay taxes and insurance premiums on homes, accurate payment records not being kept and contracts not being recorded.

Baumgartner did not have specific data on how many land contract cases his office has handled but he thought, in general, that the number has been increasing in recent years.

He attributed that to the tightening of lending by banks following the foreclosure crisis of 2007-2008, as well as more corporate real estate investment companies becoming involved with land contracts.

“It makes it harder for buyers to get leverage,” Baumgartner said.

He said he’s noticed that Fort Wayne’s Hispanic community and its growing Burmese population often get involved in land contracts.

New legislation in 2025?

The fair housing center’s report includes recommendations to provide better protections for consumers.

Those recommendations include a call for a statewide educational campaign on land contracts, federal action, strengthening state legislation and federal Truth in Lending Act enforcement and promoting alternatives to the contracts.

Citing similar laws in Illinois and Minnesota, the report also calls for Indiana sellers in a land contract transaction to be required to record the contract with the county within a reasonable period of time.

The group also advocates for buyers to have the right to cancel the contract after receiving disclosures on the sale and wants a requirement that sellers file for foreclosure in the event of a payment default.

The fair housing center also calls for stricter cancellation and forfeiture terms in land contracts, with buyers being able to be notified in writing and given time to fix defaults and sellers required to go through the court system for forfeitures instead of informally evicting residents.

Nelson said if she had to pick one recommendation to be put into a piece of legislation and passed as law, it would be the mandatory recording requirement.

“It would help me get an idea of the numbers (of land contracts), too,” Nelson said.

In 2020, Clere authored House Bill 1191, which provided language for required land contract disclosures and recording provisions.

The bill passed the House 84-9 but did not make it out of the Indiana Senate.

Clere said he remains interested in the issue and is open to introducing legislation in the 2025 legislative session, although he noted there will be a lot of different issues the General Assembly will be considering next year.

If land contract legislation is introduced, Clere said it could be as a standalone bill or within language included in a broader housing bill. •