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Why contract for deed arrangements can be risky for homebuyers

A MARTINEZ, HOST:

Prospective homeowners who can't qualify for a home loan are often desperate to find options that don't involve a bank or mortgage lender. An alternative called contract for deed started booming after the housing bubble popped in 2008. But homebuyers beware - the arrangement can be a risky one. Steve Vockrodt of the Midwest Newsroom reports.

STEVE VOCKRODT, BYLINE: Most people who buy a house simply apply for a mortgage and close on the property they want. That's the last time they deal with the seller. But some who can't qualify for a loan opt for another method of financing a house purchase, where the seller basically also acts like the lender. Contracts for deed and similar transactions, like renting to own, are thinly regulated in most states, and they often don't result in the buyer actually owning the home.

LANCE LOWENSTEIN: Contracts for deed are kind of like the buy-here, pay-here car lots of the real estate business.

VOCKRODT: That's Lance Lowenstein, a Kansas City attorney who says he sees cases where the buyer is trapped in a deal that went sideways about once a week.

LOWENSTEIN: They exist to allow people that don't have access to traditional banking, either because of their credit history or their job status - it gives them an opportunity to buy real estate.

VOCKRODT: Contracts for deed and similar arrangements, like renting to own, happen all across the country, and it's hard to get precise data because they're not regulated the way mortgages are. The way these deals often work is the seller collects a down payment and then gets monthly installments. The buyer is usually on the hook for taxes, insurance and any repairs. And unlike a mortgage, it's the seller who holds onto the title until the house is paid off. That means if a buyer falls behind on their payments, sometimes even one installment, the seller can reclaim the property, leaving them with no equity and losing any money that they spent in proving the property. Many of these houses are in poor condition and in low-income neighborhoods.

For people who can't get a mortgage, such arrangements can be their only path to buying a house. And sometimes they work out just fine. But housing advocates say often they don't. Sarah Mancini of the National Consumer Law Center says more often than not, they're risky for buyers.

SARAH MANCINI: The buyer is being told they have all the duties of homeownership, but they don't get the protections of a right to a foreclosure, and they don't have a deed, and they don't have a right to sell the home and realize the equity.

VOCKRODT: Silvia Juarez was one of these buyers. A few years ago, the 51-year-old saw a house she liked in Kansas City. She called the number on the for-sale sign and soon met the owner at a nearby Denny's. She had lots of questions about the house but says the owner pressured her to make a quick decision.

SILVIA JUAREZ: But he told me, do you want a house? And he said, well, you have to decide now because I got more people that want the house.

VOCKRODT: Though she was confused by the terms of the contract, she signed it and made an $8,000 payment, thinking she'd just bought the house. Within months, she was evicted for not making monthly payments. Following the housing crash of 2008, Wall Street-backed firms bought up thousands of foreclosed or abandoned properties on the cheap to sell using a contract for deed arrangement. Some are facing lawsuits, accusing them of trapping buyers into predatory contracts that are designed to fail. As foreclosures are on the rise again, housing advocates worry that these risky contract for deed arrangements will again become a popular but risky last resort for prospective homeowners.

For NPR News, I'm Steve Vockrodt in Kansas City. Transcript provided by NPR, Copyright NPR.