What are land contracts, and what risks do they pose for potential homeowners?

Homeownership continues to climb out of reach for some people in the U.S., leaving them to look for alternative options to accomplish what has been historically deemed "The American Dream."

Indiana has been ranked as more affordable for potential homeowners according to a study from the Fair Housing Center of Central Indiana, with an overall homeownership rate of 55% in Marion County. But a deeper look into that number reveals racial disparities.

With the belief that the traditional path to homeownership is not viable for them, some people have turned to land contracts — marketed as a bridge to cross the widening gap of homeownership. But that bridge is wobbly and full of missing pieces, with predatory sellers often offering a false sense of security that can make it easy to lose.
 

What are land contracts?

Also known as a contract for deed or land installment contract, a land contract is an agreement where the buyer makes payments to the seller until it is fully paid.

The process makes the seller the lender and avoids going through a mortgage company or bank to loan the money. In most cases, during the length of the contract the seller retains the deed to the house until the final payment is made.

Land contracts have existed in various forms throughout history, but the agreements in their common form took off during the mid-20th century. The contracts found popularity amongst Black buyers in the 1960s and 70s when redlining prevented them from being able to obtain traditional mortgages through the bank.

After the 2008 housing crisis, land contracts gained another usage due to stricter standards to obtain a loan.
 

Targeted groups

Black people continue to make up a sizable portion of those that choose to enter into land contracts. This is in part due to the continued higher rate of denial than other racial groups for traditional mortgages. 

A recent study from Lending Tree found that in Indianapolis, 17.2% of Black buyers were denied a loan, the sixth highest metro area in the country. While slightly lower than Black buyers, Latinos also face a higher rate of denial nearly 1.5 times their white counterparts according to a national analysis by the Urban Institute.

Reasons listed for the higher denial rate are applicants having a high debt-to-income ratio, insufficient collateral, credit history and "other."

An article from the Federal Reserve Bank of Minneapolis in 2024 looked at the denial reasons between Asian, Black, Latino and white applicants. It highlighted another issue Black and Latino people face at a higher rates which is having limited or no credit history, also known as "credit invisible."

There are still many people that could qualify for a loan, they could feel this is their only option.

"The primary reasons why potential homebuyers may seek out a land contract are having low credit or no credit history and/or not having a social security number," the report.

Since land contracts don't require a social security number, people without legal status can be targeted. One possible alternative for people without a social security number is using their Individual Tax Identification Number that can be used for an ITIN mortgage.

A 2024 report from the Fair Housing Center of Central Indiana reviewed 600 land contracts. It found 85% of those contracts went to buyers with Hispanic sounding names.Report authors said that they believed this to be due to Hispanic consumers being targeted.

"These companies advertise extensively, and sometimes exclusively, in Spanish; appear at or sponsor Hispanic community events; take out ads on Spanish-language television and radio; run social media pages in Spanish; and partner with trusted Spanish-speaking staff or real estate agents in the community," the report stated.

There are some land contract offerings that can provide a successful alternative path to homeownership, but reports show that there are many predatory businesses bad-acting in the market as well.

The 2024 report from FHCCI found that four companies made up 41% of the land contracts that were recorded: S&C Financial Group, OwnEZ Asset Management, SLB Investments/Job Capital, and LKE Properties.

Research has found there are an abundance of risks with the contracts that should give people pause before entering into an agreement.

Predatory terms of the agreement can include high interest rates and fees, prepayment penalties, balloon payments and back payment of taxes. Those in a land contract are also usually unable to tap into home equity for major expenses such as home repairs.

A review of about 40 land contracts in Marion County, FHCCI found the sellers could file for eviction against the buyer without any notice through the default terms. In traditional mortgages, the lender would have to go through foreclosure filings which could give the homeowner the ability to pay back money owed and keep the house.

Researchers point to concern that land contract sellers can file for eviction giving the buyer less time to resolve the case. In Marion County, the FHCCI report finds that people are potentially being evicted without any filings at all — eviction or foreclosure.
 

Possible solutions through legislation

Efforts to better track land contracts and protect buyers have been discussed among Indiana lawmakers. Unlike mortgages, land contracts are not required to be filed in Indiana, which can create challenges in knowing how many exist.

In Illinois, lawmakers passed legislation that requires the seller to record the contract within 10 business days following the sale. Indiana requires no such filing.

State lawmakers have considered a similar measure to require land contracts to be filed with the county clerk but the legislation has never made it to the governor's desk for final approval.

Another legislative effort has been to clarify the terms of the contract. This type of measure would help protect people from being evicted as part of the default terms of the agreement.

Contact WFYI All Things Considered Newscaster and Reporter Samantha Horton at shorton@wfyi.org