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Why are we fighting for Contract for Deed Reform?

By: Olaitan Olanrewaju

For years, Somali families have faced systemic barriers to homeownership, exacerbated by their religious principles which shun traditional mortgage financing. In recent times, however, a seemingly promising alternative emerged: contracts for deed. Contracts for Deed, though legal, are fraught with peril for the buyer. In a Contract for Deed arrangement, the buyer makes monthly payments to the seller over a set period. Upon completion of this period, the buyer is required to make a substantial “balloon payment” to settle the total purchase cost of the property. Failure to pay this balloon payment often requires the buyer to secure a loan from a bank. Should the buyer default on either the balloon payment or any of the monthly installments to the seller, they risk forfeiting both the property and all payments made thus far. Unlike traditional mortgages, these agreements offer scant protections, allowing sellers to retain ownership papers until the final payment is made. Many buyers, lured by the prospect of homeownership and unaware of the intricacies of these agreements, find themselves in dire straits, their dreams of stability shattered by the harsh realities of financial exploitation. 

Touted as an interest-free path to homeownership, these agreements have drawn in many eager Somali families seeking the promise of suburban life. But beneath the veneer of opportunity lies a sinister reality: predatory practices and poor regulation have transformed this supposed pathway to prosperity into a financial trap, ensnaring unsuspecting buyers in a cycle of debt, fear, and uncertainty.

ProPublica’s 2022 exposé calls attention to the plight of one Somali truck driver, who fell victim to these contracts. Desperate to provide a better life for his family, he embarked on the journey to homeownership, only to find himself teetering on the brink of financial ruin mere months after signing the agreement. His story, echoed by countless others in Minnesota’s Somali community, highlights the urgent need for greater oversight and consumer protections in real estate transactions.

While proponents of contracts for deed may contend that they offer a lifeline to individuals with imperfect credit histories, the truth remains stark: these contracts disproportionately affect marginalized communities, perpetuating glaring disparities in homeownership rates. According to 2019 American Community Survey (ACS) data, White/non-Latinx individuals in Minnesota own homes at a rate of 76.9%, a stark contrast with the mere 25.3% homeownership rate among Black individuals. This vast discrepancy underscores the widening racial divide in access to housing wealth. In a state plagued by one of the nation’s widest racial homeownership gaps, the proliferation of predatory contracts only serves to deepen systemic inequities, trapping minority families in poverty and insecurity.

Legislation enacted in the wake of the 2008 housing crisis sought to curb the excesses of contracts for deed, yet loopholes and lax enforcement have rendered these measures inadequate. The law mandates sellers to provide buyers with a notice detailing the transaction’s risks, but enforcement remains toothless, leaving buyers vulnerable to exploitation. Calls for stronger regulations and safeguards abound, yet progress has been slow, leaving countless families at the mercy of unscrupulous sellers and predatory lending practices. As a member of the Contract For Deed Reform (C4DR) coalition, Ayada Leads is working to be part of the solution. The is a coalition of community-based organizations dedicated to advocating for policy reform and fostering grassroots backing for housing equity in Minneapolis. Together, our collective efforts are focused on championing the implementation of protections for the buyers. With these efforts, Ayada Leads hopes to foster inclusive and equitable housing solutions within our community.

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