Lawmakers Introduce Bill to Reform Controversial Contract-for-Deed Home Sales

A pair of U.S. senators introduced a bill Thursday that aims to curtail the misuse of a home buying agreement known as contract for deed, a potentially predatory practice that has targeted immigrant communities.

The Preserving Pathways to Homeownership Act of 2024, introduced by Sen. Tina Smith, D-Minn. and Sen. Cynthia Lummis, R-Wyo., would require states to enact laws that provide additional protections for home buyers and discourage exploitative behavior by sellers.

“It makes me so angry that people who are trying to pursue the dream of owning their own home” and that “those individuals would be exploited by these unscrupulous sellers, purely to make money off of them,” Smith said in an interview this week. “I mean, it’s just so outrageous.”

The senators drafted the bill in response to a 2022 investigation by ProPublica and Sahan Journal that identified a rising market in Minnesota for home sales using contracts for deed, an installment payment agreement made between the seller and the buyer without the involvement of a bank. While proponents say the contracts create a path to homeownership for those without good credit or substantial work histories, critics say that in Minnesota and other states, the deals lack key consumer protections.

Contract-for-deed sellers in Minnesota marketed their services directly to members of the Somali Muslim community. Many practicing Muslims avoid paying or profiting from interest, which effectively shuts them out of the traditional mortgage market.

In recent years, investors began promoting the 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. The deals were frequently fast-tracked and conducted without the involvement of a lawyer and without an inspection or appraisal of the property.

Somali homebuyers told Sahan Journal and ProPublica that they were duped into contracts they did not understand, with exorbitant down payments and lump sums of hundreds of thousands of dollars due at the end of five-year contract terms. Housing rights advocates say immigrant homebuyers who lack financial literacy and may not read or speak English fluently are easy targets for unscrupulous sellers. Under Minnesota state law, buyers in default can be evicted in as little as 60 days and lose everything they’ve put into a purchase, leaving sellers free to flip the property to a new buyer.

The article sparked concern not only from lawmakers, but from law enforcement. The Minnesota Attorney General’s Office launched an investigation last year into whether sellers broke the law by targeting minority buyers or using deceptive tactics. That investigation is ongoing, according to Mark Iris, the assistant attorney general leading the inquiry. In a previous Senate subcommittee hearing on the contracts — also known as land installment contracts or land contracts — Smith characterized the deals as “designed to fail.”

If passed, the legislation from Smith and Lummis would standardize laws surrounding contracts for deed on residential properties, which vary widely from state to state. It would not apply to commercial or agricultural real estate sales, and sellers who used the property as their primary residence in the previous two years would likewise be exempted. The latter is an attempt to exempt contracts between, say, parents and an adult child.

The bill would require all contracts be filed by the seller with a recorder of deeds office within five days of their signing, a step that is not currently mandated in all states and would provide a “basic level of sunshine on the process,” said Smith. A lack of documentation can result in exploitative practices, like selling the same property multiple times.

The bill would also require that if a buyer defaults, they and the seller must go through state foreclosure procedures that apply to traditional mortgages. Such protections typically allow residents to remain in a home for a period of time before they must vacate. Smith said that there’s also interest in the House on a companion bill.

“It's kind of like a basic level of safety and consumer protection that ought to be available for everybody who is engaging in a purchase through a contract for deed,” she said.

Ron Elwood, supervising attorney at the Legal Services Advocacy Project, the policy advocacy arm of Legal Aid in Minnesota, said the legislation is also intended to create a “built-in speed bump” to discourage sellers who act in bad faith. He said he is working with state legislators on a “complete overhaul” of Minnesota contracts for deed law.

That effort is being authored by Rep. Hodan Hassan and Sen. Zaynab Mohamed, both Democrats who represent districts in south Minneapolis; according to Elwood, legislation will be introduced this session. Hassan and Mohamed did not respond to requests for comment.

Jeff Scislow, a real estate agent who has sold homes to many Somali clients using contract for deed, said he supports a requirement that all contracts be recorded but has reservations about adding a foreclosure process in cases of default. He said Minnesota has a six-month period before homeowners must vacate when they don’t need to make payments.

Because contract-for-deed sellers often take out a mortgage to purchase a home before selling it, Scislow wrote in an email, the prospect of an extended period of nonpayment “would heighten the risk for sellers and likely dissuade many from engaging in contract-for-deed transactions.” If the current 60-day cancellation period were extended, he added, it “could limit opportunities for buyers, especially those with poor credit, insufficient tax return history, or those seeking alternatives to traditional financing.”

But Farah Mohamed, owner of Gurisan Realty and a member of the Minneapolis Area Realtors’ Diversity, Equity, and Inclusion committee, said lack of regulation has allowed the market to go too far in the Somali community. One of the most troubling things he’s seen is how contracts have been promoted as “halal” by local religious leaders, making it difficult for buyers to separate the transactions from their religious principles.

Mohamed said he was approached by an investor seller to recruit buyers from his largely Somali clientele, but he refused. He is working to educate community leaders about the pitfalls of the contracts, but said he has encountered resistance. “Once you start in a religious place,” he said, “it’s tough to kill it.”