Hundreds of broken-down houses still dot the streets of this onetime tire capital of the world, a scar from the financial crisis and housing bust.
The wood has rotted in some; others have black mold, broken windows or failing foundations. Many lack working electrical systems or are missing water pipes and furnaces. The unpaid property taxes mount.
Dozens of these houses were scooped up after the financial crisis by investors, who then make deals with low-income home buyers unable to get traditional mortgages. The arrangement is something like buying a home on an installment plan, with a high-interest, long-term loan called a contract for deed, or land contract.
But for buyers lured by the dream of homeownership, these seller-financed transactions can become a money trap that ends with a quick eviction by the seller, who can flip the home again. Before the housing crisis, low-income buyers got too much of a house that they couldn’t afford. Now, they are getting too little of a house that they can’t afford to repair.
It is a scene playing out across the Midwest and the South, where many of the derelict houses have been sold to private investors by government mortgage firms at knockdown prices.
Nationwide, more than three million people are estimated to have bought a home through a contract for deed. After the financial crisis, as banks retreated from lending to those with poor credit, this odd corner of the housing market began to draw interest from deep-pocketed investors who sometimes sell the homes for four times the price they paid.
“There is this whole other way that people buy homes. It is very much under the radar and hidden,” said Heather K. Way, a professor of law at the University of Texas. “Homeowners go into this without knowing that this is such a high-risk contract fraught with perils.”
Now, complaints are piling up in cities across the country, according to dozens of court records reviewed by The New York Times, as well as interviews with housing lawyers and home buyers in Ohio, Michigan and Minnesota.
In Akron, some investment firms aim at residents “who do not have the financial ability to comply, nor the savvy to realize that they are being taken advantage of,” said Duane Groeger, the city’s housing administrator, whose office oversees code violations.
One of several firms Mr. Groeger’s office has fielded complaints about is Harbour Portfolio Advisors of Dallas.
One of the larger firms in this market, Harbour has bought more than 6,700 single-family homes in Ohio, Michigan, Illinois, Florida, Georgia, Pennsylvania and a handful of other states since 2010 — most of them from Fannie Mae, according to the mortgage finance firm and the foreclosure research firm RealtyTrac.
Ten of the more than 50 homes Harbour bought in Akron have been torn down after being condemned and two others are slated for demolition, Mr. Groeger said.
In Detroit, 300 homes bought by Harbour have received notices for prolonged failure to pay property taxes, according to a Wayne County website. Harbour disputes the accuracy of the county’s figures and says the number of homes it owns in Detroit is much lower.
Swimming in Debt
Lacking the means to fix up the homes, those who enter into contracts with Harbour often end up swimming in debt, a review of lawsuits shows.
Kevin Franklyn, 46, of Detroit said he struggled with making repairs on a $44,925 Harbour house in 2011. After falling behind on the payments, he recently agreed to forfeit the contract to the house. The roof, plumbing, electrical system and drywall all needed serious repairs, he said.
His fiancée, Lisa Micou, 46, said the home was in greater disrepair than the couple had anticipated.
“Everybody wants that part of the American dream — everyone wants a piece of that pie,” she said.
In Battle Creek, Mich., Patricia Howard entered into a contract for deed with Harbour for $28,800 in April 2014. Soon after, she fell behind on her monthly payment of $280, excluding taxes and insurance.
Ms. Howard, 54, said she had to spend thousands of dollars on critical house repairs.
“I’m behind because I had to fix the plumbing, and now the gutters on the side,” said Ms. Howard, whose main source of income is her monthly disability checks. “It’s like one thing after another is falling apart.”
In December, she reached a court settlement with Harbour that gives her until March to make up the 10 missed payments. If she cannot come up with the money, Ms. Howard will have to forfeit the contract and leave the house.
Harbour bought the home from Fannie Mae for $7,691.
A lawyer for Harbour and its founder, Charles A. Vose III, said the firm was not responsible for renovating homes it sells under contracts for deeds.
“Harbour’s business model is to purchase unproductive residential properties and sell them to other people who will make them productive again,” the lawyer, Jacqueline Mallett, said.
Ms. Mallett added, “Contract for deeds are a lawful financing tool sanctioned by state laws” and said Harbour “does not target prospective buyers.”
Mr. Vose, 46, who would not comment directly, is a familiar figure on the social and arts circuit in Dallas. He and his wife, Merry, live in a multimillion-dollar home where they hold lavish fund-raisers. In November, they were some of the hosts of a fund-raiser for the Perot Museum of Nature and Science.
Harbour, which raised more than $60 million from wealthy investors, was the single largest buyer of foreclosed homes from Fannie Mae’s bulk sale program from 2010 to 2014, which the mortgage giant used to unload more than 20,000 homes that were hard to sell. The homes were bought by Harbour for an average of $8,000 each in cities like Akron, Detroit and Flint, Mich.
Representatives for Fannie Mae, which was effectively taken over by the federal government, said it had an obligation to minimize losses to taxpayers by selling homes first to residents and nonprofits, and then to investors. Fannie Mae notes the bulk sale program for hard-to-sell homes accounted for a small fraction of the 900,000 homes it has sold since the financial crisis.
More than a dozen Harbour contracts reviewed by The Times — including Ms. Howard’s — all ran for 30 years, carried a 9.9 percent interest rate and required buyers to bring their property into “habitable condition” within four months. The contracts also contained an arbitration clause to settle disputes between seller and buyer, a stipulation that consumer advocates contend strips buyers of the right to litigate onerous clauses in a courtroom.
Fewer Protections for Buyers
Provisions in a contract for deed are enforceable as long as they do not conflict with state law. The home dweller has more limited protections than a person buying a house with a mortgage, and evictions are quicker than a foreclosure. The residents are typically responsible for repairs and paying all property taxes, but the legal title under a contract for deed does not transfer until the final payment is made — an end result that rarely happens.
Robert Doggett, Texas RioGrande Legal Aid’s general counsel, says contracts for deeds “take advantage of people’s desperation” and can worsen neighborhood blight.
Some municipalities seek to hold the sellers of contracts for deeds liable for correcting housing code violations, but that can be difficult. In some states, like Michigan, there is no requirement that a contract for deed be recorded, making the market hard to monitor.
Consider the case of a house at 950 Independence Avenue in Akron. Harbour sold a contract on it in September 2011 after a private inspection firm it hired prepared a report that said the home was not in need of repairs. The contract was bought by a local couple for $34,725. A few months later, the house was condemned by Akron officials and the couple, who operated an auto repair company on the premises, was forced to leave.
The city razed the house in 2014. It is now a vacant lot, with about $11,000 in taxes owed on it.
Mr. Groeger said getting Harbour to respond to outstanding code violations on homes had been “an exercise in futility.”
Ms. Mallett, a lawyer with Bricker & Eckler in Columbus, Ohio, said Harbour began using new contracts a year ago that were “compliant with state law” and made clear the buyer’s obligations. She said that it was not Harbour’s “intention to frustrate city officials” and that the firm’s asset manager “responds to all of the code violations.”
A sample revised contract provided by Ms. Mallett eliminated some of the provisions legal experts found problematic, like one that required a buyer to make necessary repairs within four months of purchasing the property.
Each house Harbour sells in a contract for deed is inspected by a third party and it discloses any outstanding tax liens and housing violations, she said.
The home at 950 Independence Avenue, she said, should not have been razed and could have been rehabilitated. Ms. Mallett said many of the 300 homes in Detroit listed as being delinquent on taxes by Wayne County were sold, to other investors or individuals, a while ago.
Harbour, she added, has stopped buying new homes across the country. In Detroit, the firm owns eight homes outright; 53 others were sold in a current contract for deed, she said.
Still, Harbour spends a good deal of time in court seeking to foreclose on those who default on contracts or seek relief in bankruptcy proceedings. Over the last five years, Harbour appeared as a creditor in nearly 100 personal bankruptcy cases. Court records also show that Harbour sold homes and bankruptcy claims to other firms.
Sometimes It Works
Not all contracts for deeds are as contentious.
One Minnesota nonprofit program called Bridge to Success sells homes using contracts for deeds.
Pete Flom, an executive with the program, said the contract was “just the vehicle to get someone in the house.”
The initiative, by Dayton’s Bluff Neighborhood Housing Services and the Greater Minneapolis Housing Corporation, requires financial coaching and one-on-one counseling for buyers.
Carolyn Olson, of the housing corporation, and Jim Erchul, of Dayton’s Bluff, started the program during the financial crisis, buying more than 400 homes in foreclosure. The program uses financing from U.S. Bancorp and wealthy investors, and some of its achievement stems from the fact it can buy homes that need fewer repairs.
The average home sold in the Bridge to Success program goes for around $145,000, with a monthly payment of $1,100, which includes interest payments of 7.5 percent. The contracts run for 10 years, but the expectation is that buyers will graduate out of the program by either refinancing the deal with a bank mortgage, or by selling the home.
One program participant, Betty Jo Zepeda, 46, was sleeping in cars and on friends’ couches after her marriage broke up.
“I found myself in a place that I had never been in my adult life,” Ms. Zepeda said. “No home, no job. Nothing.”
She got a full-time job in 2014 as an administrative assistant at a local school and bought a $180,000 house through the program. In November, she qualified for a mortgage through Mid-Country Bank.
“I ate a lot of peanut butter and jelly, a lot of beans, a lot of rice just to be able to refinance and to have this be my home,” she said.
Even one Wall Street figure argues that seller-financed programs can help consumers.
Jeremy Healey, a former executive at the hedge fund Eton Park Capital Management, says his new firm, Battery Point Financial, rehabilitates all the homes it sells in a contract for deed.
Mr. Healey said his firm had structured its 20-year contracts to be compliant with new federal guidelines for high-interest mortgages.
“We never want anyone to default,” he said.
Kohlberg Kravis Roberts & Company, the private equity giant, has committed up to $40 million to Battery Point.
To date, Battery Point has bought more than 300 homes in 16 states and intends to resell the properties for around $72,000. It is completing sales contracts for about 20 homes. It has sold three homes in Akron — which has had no complaints about Battery Point — including one near the city’s airport, where the Goodyear airships were once housed.
Some seven miles away, the vacant lot at 950 Independence Avenue remains for sale.