A rising number of Americans struggle with obtaining low-cost and attainable housing in their communities and states.
American homebuyers and renters face significant financial challenges, including increases in the cost of home-building materials, inflation, rising interest rates and a surge in homebuying during the COVID-19 pandemic. The median sale price of a home in the United States at the end of 2022 was $467,700, an increase of 31.1% from mid-2020, when the median price was $322,600, according to the Federal Reserve Bank of St. Louis. Americans’ wages are not keeping up.
Most home buyers will go through a third-party mortgage lender to get a traditional mortgage; however, as more individuals struggle to access mortgage loans for low-cost housing, some will turn to alternative financing arrangements. These commonly include rent-to-own agreements, land installment contracts and personal property loans, which often are used to purchase manufactured housing.
Alternative Financing Defined
- Land installment contracts or contract for deed: A seller will extend credit directly to a buyer, and the buyer pays installments on the debt during an agreed-upon timeframe. A third-party lender is not involved, and the agreement is between only the buyer and seller. The deed for the property is not transferred to the buyer until all debts have been paid to the seller. In 2023, lawmakers in at least five states introduced legislation regarding land contracts: Hawaii, Indiana, Kansas, Maryland and West Virginia.
- Rent-to-own and lease purchase agreements: The seller is also the landlord, and the buyer resides in the property as a renter. These options can range in duration and give the tenant the opportunity to purchase at the end of the agreement or term. The payments or some portion of the “rent” paid during the agreement can be applied to the purchase of the property.
- Personal property “chattel” loans: Often used to purchase a manufactured home only, and not the land beneath the home. Although a lender will offer financing, these loans have fewer consumer protections and typically have higher interest rates and shorter loan terms than a traditional mortgage.
The Pew Charitable Trusts conducted a national survey of adults to understand borrower demographics and how frequently alternative home financing methods are used. The research found that about 1 in 5 home borrowers, or roughly 36 million Americans, have used alternative financing at least once in their adult lives. About 1 in 15 borrowers are using alternative financing as of June 2021. Pew also found that Hispanic borrowers disproportionately used these methods; however, the use of alternative financing varies by race and ethnicity.
Alternative financing options can help buyers unable to get a traditional mortgage, but they often exclude third-party lenders and are not subject to federal and state regulations and protections.
Challenges for Borrowers
Because of the lower financial return on small mortgages ($150,000 or less), some traditional lenders choose not to make them. This can put traditional financing out of reach for first-time buyers and those hoping to purchase a manufactured home. Additionally, buyers who are financially stable but have weak credit or no credit history or who work outside a traditional full-time arrangement can be but shut out of standard financing.
Alternative financing (except for personal property loans) offers options for these buyers but is subject to little federal regulation and is largely governed at the state level.
In some states, a buyer in a land installment contract may not receive the deed until their payments are complete, leaving them without equity or proof of ownership. This differs from a traditional mortgage, in which ownership is transferred at the time of purchase. In states that lack consumer protections, this can leave consumers vulnerable, lacking clear rights to the property and payments made toward ownership.
Depending on state law, some homes are not in habitable condition, a fact not always clear or disclosed to buyers, leaving them in a physically dangerous home. Additionally, in land contracts, consumers often are responsible for upkeep and maintenance like an owner but receive no homeowner support or protection against default, foreclosure and eviction. They are treated as renters but without the full protections of either an owner or a renter. Since there is a lack of foreclosure and eviction protections, it is possible that buyers who miss even one payment could be evicted from their homes.
Opportunities in State Legislatures
Few states have developed comprehensive policies to address this market and provide access to safer alternatives for consumers. Some states have laws to address land contracts and include some protections. For example, Illinois passed the Installment Sales Contract Act in 2017 to increase protections for buyers from predatory selling practices. The act requires disclosures of building code violations, inspection rights for buyers and requirements on when sellers must record their installment contracts. California’s civil code has been interpreted by courts as providing buyers a right of redemption that can be removed only by foreclosure. A North Carolina statute protects buyers under a land contract in numerous ways, including providing a window of time in which the buyer has the right to cancel, mandating disclosures of matters of public record that adversely affect the property, and requiring disclosures of which party is responsible for repairs and insurance premiums. Additionally, the contract must include several disclosures pertaining to real estate taxes, homeowner association dues and delinquent assessments. North Carolina also has a section of statute devoted to title requirements.
States can increase consumer protections for buyers and sellers with by requiring increased transparency and disclosures. During the 2023 legislative session, lawmakers in four states introduced bills addressing consumer protections. A Hawaii bill would require lease agreements for rent-to-own contracts to disclose the purchase price, rental payments, specification on the amount of rental payment to be applied to the purchase price, and a set point of when the transfer of deed will occur.
“Rent-to-own contracts have been used by unscrupulous sellers to get around foreclosure procedures when their tenants failed to make the usurious amount that is required by these contracts,” says Hawaii Sen. Joy San Buenaventura, who introduced the legislation. “Landlords usually use these contracts to prey on people who are normally unable to get traditional mortgages or get into standard leases.” She says that in Hawaii, “judges look at the rent-to-own contracts as leases, so they use summary possession procedures to kick these tenants out, even if they may have paid over 50% of the value of the home.”
An Indiana measure would define a principal dwelling land contract, set disclosures for items that must be included in the contract, and provide additional buyer protections. Kansas legislation would regulate contracts for deed transactions and make certain deceptive actions, such as a buyer not holding the title at the time of sale, violations of its consumer protection law.
West Virginia Sen. Ryan Weld introduced legislation to define land installment contracts, set requirements for vendors and vendees, and provide for default notices.
“I’m the city attorney for the town that I live in, and in that role, I saw a number of cases where unscrupulous landlords and landowners were entering into these predatory agreements and taking advantage of people who had little to no economic means,” he says.
Weld noticed issues with unsafe and dilapidated homes, with the eviction of tenants who missed a payment, and with agreements not being recorded in the county clerk’s office, even though they were a part of the property’s chain of title.
“There were a whole myriad of problems that these people were encountering, and they were essentially being taken advantage of,” Weld says.
States options also include updating the definitions of land contracts and lease purchase agreements in state statute and including the users of alternative financing in the federal Homeowner Assistance Fund. The fund provides disaster relief aid for homeowners with alternative financing methods and will provide funds until Sept. 30, 2025, or until the allocated funds have been distributed.
Opportunities in Communities
Communities can also take steps to protect consumers. The city of Detroit joined with Enterprise Community Partners and University of Michigan’s Poverty Solutions to publish the Detroit Land Contract Buyer Guide. The guide helps potential borrowers navigate the complex process of purchasing a home via a land contract, from before signing occurs to after the loan is repaid in full.
“Prior research on land contracts focused on the potential for exploitation. But we learned from Detroit nonprofit and community development organizations that land contracts are not inherently predatory,” says Evelyn Zwiebach, director of Enterprise Community Partners. “The Land Contract Buyer Guide empowers buyers, equipping them with the information they need to make informed decisions about their home purchase and identify red flags that signal a bad deal. This is a critical first step in getting more Detroiters onto the pathway of homeownership, which contributes to greater housing stability, upward mobility and generational wealth.”
New York also has taken action outside of statute to protect consumers from predatory financing agreements. The state Department of Financial Services is investigating lease-to-own, rent-to-own and land installment contracts, and is providing information to residents regarding their options and rights in these situations.
Erin Panter is a policy analyst in NCSL’s Financial Services, Technology and Communications Program.