Minneapolis officials and housing advocates are concerned about a trend in the housing market.
They say more property owners are striking up informal "contract for deed" deals as a way to sell homes to people who don't qualify for loans.
Some of these sellers are landlords the city says are using the arrangement to skirt safety and housing laws.
North Minneapolis resident George Williams, 48, bought his house through a contract for deed last year and said it was the best deal he could find given his shaky credit. He isn't able to get a mortgage.
"I don't qualify for it right now and I've been talk to the banks to see I even ran a check online to see if I qualify for it but I don't have any extra income coming in," Williams said.
In a contract for deed, the seller provides financing for the buyer, who makes monthly payments to the seller. Advocates say some contracts for deed, especially those provided by non-profit housing organizations, are fair.
But unlike a traditional mortgage, contracts for deed are usually just a few years long — typically three to five years. So most buyers have to refinance in order to make a balloon payment, complete the deal and get the deed to the house. But refinancing is often difficult because properties sold this way are often not appraised, so buyers may be agreeing to pay more than a home is worth. Williams is hoping to get a mortgage in time to pay his $58,000 balloon payment in three years.
"My main concern is to make sure that I am able to go to a bank and refinance on this house," Williams said.
BROKER DEFENDS PRACTICE
Williams bought his home through north Minneapolis real estate broker Howie Gangestad. The broker said contracts for deed are a good way for people like Williams, who have bad credit or low incomes, to buy homes.
"There is a lot of underground society in north Minneapolis," Gangestad said. "They don't have enough income to qualify or low credit scores due to their own fault or through no fault of their own."
Gangestad charges higher interest rates than a bank. In most cases, he said that's because buyers put little to no money down. He said nobody who could get a lower interest loan would ever buy from him. "It's not a good deal for them if they can get a regular mortgage at the bank," he said. "I would never sell on a contract for deed if they qualify."
In a contract for deed, the seller provides financing for the buyer, who makes monthly payments to the seller.
The problem is that many buyers don't understand what they're getting into, according to Legal Aid attorney Luke Grundman. As credit continues to be tight, he said unregulated contracts for deed are fueling housing fraud in areas like north Minneapolis, where foreclosed homes come cheap.
"Having properties flip this fast isn't necessarily good for the community either, if this is another wave of lending that leads to vacant households and frequent property changes," Grundman said.
But real estate broker Gangestad said he is providing a needed public service to people who want to own homes but lack access to credit. And he's unapologetic about his reasons for selling homes through a contract for deed.
"Number one, you get a higher-class person, number two, it's their house and they do really own it, number three, I don't have to pay the city $1,000 for the privilege, number four, I don't have Section 8 inspectors or city inspectors or get fined if they don't mow the grass. I got less hassles, less aggravation," Gangestad said.
That's a problem, according to Minneapolis city officials.
STEALS NOT DEALS, RESIDENT SAYS
As the number of contracts for deed rise, Acting Director of Regulatory Services Henry Reimer is concerned that landlords are using these deals to avoid regulations and rent without a license.
"Then that means that we have people that are living in properties that might not be safe and folks that truly don't have the ability to control their environment not being provided with protections for which we require rental licenses," Reimer said.
"They're not deals, they are steals," said north Minneapolis resident Nekia Tetter.
Tetter and her fiance recently turned down their landlord's offer of a contract for deed. Tetter, 38, said her landlord lost his rental license and the house was in terrible condition. The city posted a red sticker warning of unpaid assessments on the property.
Tetter worries that her neighbor, who accepted a contract for deed with the landlord, got a bad deal.
"If you're poor and you feel like your landlord is saying 'oh my god I'm giving you a good deal and this is your home, now you own this, this is not mine anymore.' And a lot of people take this small garbage that they say instead of looking at the big picture," she said.
To prevent more people from entering into contracts they don't understand, Minneapolis officials are surveying neighborhoods to find out how many contracts for deed are out there. Meanwhile, housing advocates are crafting legislation for next session they say would give more protection to contract for deed buyers.