Lawmakers Eye Predatory Practices in Contract-for-Deed

Lawmakers Eye Predatory Practices in Contract-for-Deed

Image: The town of New Ulm, Minnesota, was founded in 1854 by a group of German immigrants. Single family housing there runs the gamut of styles popular in the last century to modern and contemporary styles of today. New Ulm is predominately a farming community although growth in the county seat trading center since 1950 has been due to the arrival of manufacturing firms. Since the 1960's a community effort has helped to revitalize the business district. Photo by Graeme Phelps "Flip" Schulke, of New Ulm, via Environmental Protection Agency. 

After Seeing Controversial Contract-for-Deed Home Sales Affect Constituents, Minnesota Lawmakers Propose Reforms

by Jessica Lussenhop, ProPublica, and Joey Peters, Sahan Journal

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

The excitement that Abdinoor Igal felt after buying a five-bedroom house in a new development in a suburb south of the Twin Cities was short-lived.

At the time, it was the realization of a long-held dream — a spacious, modern home for his wife and seven children to call their own. And Igal, a 37-year-old long-haul trucker, had saved for a house for years.

But like many practicing Muslims, he had avoided paying or profiting from interest as a matter of faith, and therefore did not want to get a traditional mortgage. So in 2022, when he heard there was a new, interest-free way to buy a house using a financial instrument called a contract for deed, he jumped at the chance.

But less than two years later, Igal’s dream collapsed. After struggling to make the nearly $5,000 payments each month, last fall he put the family’s belongings in storage and handed the keys to the house, which he had agreed to pay more than $700,000 for, back to the seller. He sent his family to live temporarily in Kenya, where he owns another home and the cost of living is much lower. Meanwhile, he sleeps in the cabin of his semitruck.

Igal said he lost everything he put into the deal, one made directly between a buyer and seller without a bank’s involvement. The total: $170,000, including a $73,000 down payment. He walked away with nothing.

“They really took a very big advantage of me and my family,” said Igal, who first shared his story with ProPublica and Sahan Journal anonymously in 2022. “They make us, like, homeless.”

This week, two Minnesota state lawmakers are introducing legislation that would overhaul contract-for-deed law in the state to try to prevent the same dramatic loss from happening to other homebuyers.

State Sen. Zaynab Mohamed and Rep. Hodan Hassan, both Democrats representing parts of south Minneapolis, are behind the legislation. Mohamed introduced her bill on Monday, while Hassan expects to introduce hers later this week. The legislation follows the introduction of a federal contract-for-deed reform law by Sen. Tina Smith, D-Minn., and Sen. Cynthia Lummis, R-Wyo., this month.

Together, the state measures would enact a raft of new requirements for “investor sellers” using contracts for deed and provide buyers more ways to recoup their losses in the case of a default or bad faith on the part of the seller. Both Mohamed and Hassan are Somali and said they had heard stories of contracts for deed going wrong for constituents and members of their community.

“It could be my mother, it could be my sister,” said Hassan. “Those people are from my community, and some of them are vulnerable because they don’t understand the system and they don’t speak the language.”

The legislation is in part a response to a 2022 Sahan Journal and ProPublica investigation about potentially predatory uses of contracts for deed in Minnesota’s Somali community. The news organizations found a rising market in Minnesota for home sales using contracts for deed and complaints from buyers that they’d agreed to unfavorable terms they didn’t understand.

In recent years, real estate investors have promoted contracts for deed as an interest-free purchase agreement by first buying houses using traditional mortgages, then reselling them to contract buyers — often for tens of thousands of dollars above market price in place of any interest.

The deals were frequently fast-tracked and conducted without the involvement of a lawyer and without an inspection or appraisal of the property. Despite being marketed as interest free, deals like the one Igal signed also ultimately included interest payments at rates higher than the market, according to the contract. If a buyer defaults on a payment, they can be evicted in as little as 60 days.

Proponents of contracts for deed say the arrangements are a way for someone who otherwise couldn’t be approved for a mortgage to become a homeowner. Mohamed agreed that, when promoted honestly, contracts for deed can be “a beautiful process,” but she emphasized that too many sellers are taking advantage of buyers in the Somali community.

“You have to make sure that they have integrity in that process and an understanding that you can’t take advantage of these communities,” Mohamed said.

The bills, if approved by the state Legislature and signed by the governor, would impose regulations on investor-sellers — people that, for at least a year, have not owned or lived in the home they are trying to sell. The bill would prohibit investor-sellers from “churning” properties, or rapidly entering and canceling contracts with multiple buyers, a tactic that unscrupulous sellers can use to collect large down payments without ever losing ownership of the property. Homeowners who bought their home through a contract for deed from someone found guilty of churning or failing to make any of the new required consumer protection disclosures can recover the payments they made, minus the “fair rental value” of the home, as well as the cost of any improvements they made.

The bill gives homebuyers 10 days after receiving all disclosures to cancel their contract. And homeowners who cancel their contract within four years of buying their home can recover a portion of their down payment. If they default, they must receive a 30-day notice from the seller and have 90 days to catch up on their payments before eviction.

Hassan said she was surprised by the balloon payments, which can amount to hundreds of thousands of dollars, that are common to contracts for deed.

“That was the shocker for me, the amount of money that goes as a down payment that people are expected to come up with, and then comes the balloon payments that are expected to be paid. I’m like, this makes no sense,” she said. “That’s setting up people for failure.”

The proposed law would require not only that the balloon payment schedule be included in the paperwork, but also that all disclosures must be written in the language that was used to negotiate the deal; if a Spanish-speaking real estate broker set up the sale, for instance, the disclosures must be written in Spanish.

The bill is expected to be first heard in the Minnesota Senate’s Housing and Homelessness Prevention Committee this month.

Igal said in an interview from the road in North Dakota that he had hoped he could get out of the contract with his seller, a company called Banken Holdings LLC, without losing everything. Chad Banken, the company owner, did not respond to a request for comment.

According to his contract, if Igal had managed to make it to the end of his five-year term, he still would have owed over $500,000 for the balloon payment. But Igal said this payment schedule had never been explained to him properly before he signed the contract.

Now, Igal said he hopes to save enough money to send for his family before the beginning of the next school year. If he can accomplish that, he said they will go back to living in a rental apartment. Even though it’s been decades since he first came to the U.S. as a refugee, Igal said he feels like he is starting over from “zero.”

Still, he said he feels good that his story may prevent other families from suffering a similar fate.

“My family already broke down. We are already separate, living in two countries,” he said. “If what I started helps families stay together, I’m happy with that.”

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