Somali homebuyers targeted by contract for deed agreements, state senators consider intervention

INTERVIEWER: Minnesota senators in the housing and homelessness prevention committee are meeting at the state Capitol and one of the bills on the agenda would create protections for homebuyers who sign on to what are called contracts for deed. Now this is where instead of taking out a mortgage, you pay in installments. It offers a path to home ownership for people who struggle to get approved for a loan or don't want one.

Many Muslims, for example, do not pay or earn interest as part of their faith. These deals have been popular among members of the Somali community and they have caused some to lose homes and huge sums of money. Well, now state and federal lawmakers have introduced reforms and response to reporting by Sahan Journal and ProPublica. Jessica Lussenhop is a ProPublica journalist based in Minneapolis and she's with us right now.

Jessica, thanks for taking the time.

SUBJECT: Yeah, thanks for having me.

INTERVIEWER: Quite a story here. I understand you talked with one man, a 37-year-old trucker who's had a bad experience with contract for deeds. What was his situation?

SUBJECT: Yes, so we met Abdinoor Egal 2 years ago actually. And at the time he was freshly into this contract, he had signed it and bought this very nice home in Lakeville. Because it was what he saw others in his community doing, it was all this word of mouth. So he signs this deal based on what he said was his verbal understanding of the terms and how he was going to be able to pay it off.

And then once unfortunately, he was already in that contract. He sat down, did the math and realized, wait a minute, this is not what was explained to me. And that there's basically no way that he would be able to successfully pay off the contract in pretty short amount of time, five years. And so I've stayed in touch with him since our original reporting on this topic two years ago.

And actually just this past November, he finally walked away from the house. And his family vacated, and I think one of the big problems with these contracts is that there's really no, it's not set up for someone who starts struggling to be able to recoup basically any of the money that they've put into the house. And so he walked away basically having put his life savings into this home.

And there was really no recourse once he realized that he couldn't pay it off. So yeah, he sent his family to live abroad where the cost of living is lower while he tries to climb back out of this hole. It's a pretty sad situation, actually.

INTERVIEWER: Wow, did he have a realtor that helped him with this deal or not?

SUBJECT: He did. It was a someone who had again done some of these deals, made these connections for other people in the Somali Muslim community. And so he relied on that person quite a bit. He relied on what that person told him. Again, this is according to him and said that what was explained to him and what he ultimately signed were just not the same thing.

INTERVIEWER: Are sellers targeting Somali immigrants with these contracts because in the intro as I mentioned, it goes against Muslim faith to not pay or earn interest as part of their faith?

SUBJECT: Yeah, I think that the sellers and to a certain extent, some of these buyers would say, this is a match made in heaven. These are buyers who can't get a mortgage who either because of their faith or maybe they don't have great credit or they don't have long work histories.

This is an option that they can use to become homeowners and for many people that's the realization of a long held dream that they may not have seen any avenue towards. We have learned that most of our reporting focused on the East African Muslim community. But also the Spanish speaking community, again, issues of not having credit, not having work histories. These are also people who were having these deals marketed to them.

And so I think the problem winds up being, because there are so few consumer protections. Because these are people who may not be familiar with our financial system, who may not speak the language or be able to read these contracts well, that's when you wind up in these gray areas that start looking a little worrisome and even potentially predatory.

INTERVIEWER: So now the state Senate and the state house are considering some reforms. What would these bills do?

SUBJECT: The bill does a lot and some of it gets pretty into the weeds. I would say that the main things that the Minnesota bills will do, they specifically identify and define what they're calling investor sellers. And so if you are not an investor seller or someone who does this for a living, is trying to make money off of these contracts, then you wouldn't be affected.

In the course of this reporting, I learned that people in my own life have bought a house from their parents on a contract for deed. It's just a way to sell a house if it's two parties that know each other, trust each other, there's no reason to get a bank involved.

So the bill is designed to leave those sales to the side. If you're trying to make money. If you're an investor seller as defined by the law. Then this all pertains to you. And specifically, it tries to prevent and punish what could be scammy deals in particular a practice that again the bill calls churning.

Which is if you are-- one version of this being a scammy predatory thing is writing these contracts intentionally knowing that the buyer really has no hope of successfully paying it off. And so because it's designed to fail, you get these payments. You get a great big down payment up front.

And if people fail out of the deal pretty fast, that home still belongs to the seller and they can just say, Oops, sorry, thanks for the down payment. Thanks for all these payments but you're out of luck. You're out of here and I can just turn around and do the same thing with another person which again the bill regards that as churning and the bill would make that practice illegal.

INTERVIEWER: Is this, there's, of course, the state proposals but also a federal proposal too, is that correct?

SUBJECT: Yeah, so Senator Tina Smith has introduced a federal law and it's interesting because contracts really have a very long history in this country. They've been used forever. Again it's intuitive, it's just a seller selling to a buyer. No bank involved so contracts for deed, they go by different names and different states. But they also are regulated extremely differently in all different states.

Some states have basically, no regulations whatsoever and it's just lawless, wild west situation. Tina Smith's bill would force a regulatory floor where all states basically have to do basically, make sure that the contract is recorded in some way with the state. But also makes it so that contract for deed home sales fall under some of the same procedures as home buyers go through when they go through a foreclosure.

And foreclosure law in many states including Minnesota, provides an additional level of protection, extra time to get your payments up to date or to sell or refinance. It's just a much more highly regulated way when a housing deal unfortunately goes bad.

INTERVIEWER: So this is the first hearing for this bill here on the state level. Any sense when you've talked to the bill's sponsors of how likely they could become law of these bills?

SUBJECT: Always hard to predict the future.

INTERVIEWER: Of course.

SUBJECT: I think that this is a housing. It's an alternative financial agreement. It's a little niche. It's probably not the most controversial housing bill that's out there this session. So and just by glancing at the agenda today, there's already a number of letters of support. So it may sail right through. But you know who knows?

INTERVIEWER: Yes, you're absolutely right. Who knows about the legislature. Jessica, thank you so much for explaining this to us.

SUBJECT: My pleasure.

INTERVIEWER: Jessica Lussenhop covers Minnesota for the nonprofit investigative news organization ProPublica. You can find her work with Sahan Journal at sahanjournal.com.