Tuesday November 22, 2022
By Jessica Lussenhop, ProPublica, and Joey Peters, Sahan Journal,
Data analysis by Haru Coryne, ProPublica
For Somali Muslim families in Minnesota, a contract for deed seems like an easier path to homeownership. But predatory practices and poor regulation can make it a financial trap rather than a good deal.
IMRAN HUSSEIN, SPECIAL TO PROPUBLICA
For many Somali families in Minnesota, the barriers to home ownership have long seemed insurmountable: reluctant lenders, low incomes, short work histories, little credit.
Members of the East African Muslim community encounter an additional, unique challenge: Because of the principles of their faith, many avoid paying or profiting from interest. This means they typically won't apply for traditional mortgages. As a result, the conventional path to buying a house — and the accompanying hope of building generational wealth — has been nearly impossible.
Roughly three years ago, a handful of lending firms began offering an "interest free" way to buy a home. Word spread fast in Minnesota's Somali community, which numbers about 80,000 people. Families began moving out of their cramped apartments and government-subsidized housing and into homes in the suburbs with expansive lawns and enough bedrooms for their large, multigenerational families.
The seeming solution came in the form of a short document with three boldfaced words at the top: "Contract For Deed." An alternative way to purchase a house, a contract for deed is, at its simplest, a financial agreement in which a buyer pays the seller directly in installments. No mortgage. No bank.
But seller financing, as it is also known, lacks key protections for the buyer. Until the final payment is made, the seller holds the ownership papers to the property, and the contract can be canceled by the seller if the buyer falls behind on their monthly payments. If that happens, the buyer forfeits all the money they've put into the purchase, including the down payment. The seller could then evict the buyer after as little as 60 days.
Many buyers mistakenly believe if they make the monthly payment stipulated in their contracts, they will successfully pay off the home by the end of the contract term. But those payments may only add up to a portion of the price of the home, and the buyer is expected to make up the difference with a lump-sum payment, known as a balloon, or by refinancing the loan. The lenders almost have an incentive for contracts to fail. They get the home and pocket the payments.
To prospective Somali buyers desperate for extra space, safer neighborhoods with better schools and the chance to pass a home on to their children, any deal was better than no deal.
One of those buyers was a long-haul truck driver who for years had rented an apartment in a Minneapolis suburb. The apartment was too small for his wife and their growing family; their children had to double and triple up in the bedrooms. Buying a house had always been the couple's goal, but the husband believed his credit score was too low.
Still, he couldn't help himself from perusing listings on real-estate websites and attending the occasional open house. One day, he took two of his children with him.
"'Hey, Dad, this house has more bedrooms. This house has a playground.' They've never seen their own yard," said the trucker, who spoke to ProPublica and Sahan Journal on the condition he not be named. "They were really excited. That's when I say: 'OK, I can do it. If my kids are happy like this, I can do it.'"
The trucker, a quiet, nattily dressed man in his mid-30s, contacted a friend who recently had bought a house and asked how he did it. The answer: a contract for deed. Following the same steps as his friend, this summer the trucker purchased a spacious home in an outer-ring suburb south of Minneapolis.
But just two months later, he said, the contract had already become unmanageable. His family is at risk of losing not only the house, but about $100,000 they have paid, including a hefty down payment. He said he never understood the disadvantages and quirks of the contract for deed.
Now, it's too late to get out of it.
"It's really scary," he said. "To be honest, you're sleeping right there and you can't think of it as if it's your house."
Fartun Weli, the CEO of Isuroon, a nonprofit that advocates for Somali women and girls, said her housing team has been trying to gauge the scope of the problem in the Twin Cities, where affordable housing is scarce.
She estimates at least 100 Somali families had purchased homes with contracts for deed but believes there could be many more. Last year, more than 1,800 contracts for deed were signed in Minnesota's 11 most populous counties — all of which have more than 100,000 residents and which include Minneapolis and St. Paul, as well as cities such as St. Cloud, Rochester and Duluth. (Neither the state nor counties track these sales by race or ethnicity.)
Many of those contracts were for newly constructed, multibedroom homes that sold in the mid to high six figures; some sold for close to $1 million. According to the contracts, buyers could lose hundreds of thousands of dollars if they default, as well as the house itself.
Sahan Journal and ProPublica spoke to five Somali homebuyers who said they signed contracts they did not understand, though none would agree to be identified. Weli said she is alarmed that so many Somali families are entering into precarious real estate transactions believing they have found a "shortcut" to homeownership.
"It's so delicious, the bait. Well, you don't really know when you swallow there's a sourness, a small piece of cyanide that's getting to you," Weli said. "Contract for deed is really an amazing trap for our community."
There is nothing illegal about contract-for-deed agreements. Defenders say they offer an alternate path to home ownership for people whose financial circumstances don't fit the standards set by conventional mortgage lenders.
"There are buyers out there who don't necessarily have pristine credit. That's the purpose of a contract for deed," said Larry Wertheim, a real estate attorney in Minneapolis who has worked with these kinds of agreements for decades. "They do serve a purpose. But, you know, they can be abused, too."
But Wertheim and other housing advocates say the market needs stronger consumer protections.
In the wake of the 2008 housing crisis, the number of contract-for-deed agreements spiked, sparking a wave of defaults.
"Most of those contracts for deed were designed to fail," said Luke Grundman, litigation director at Mid-Minnesota Legal Aid. "They may have sunk tens of thousands of dollars into the down payment and monthly payments. And then it's not just the actual money but the false hope of homeownership."
Since 2012, the number of contracts in Minnesota's 11 most populous counties declined, from a high of about 2,500 that year to a low of about 1,500 in 2020. But that downward trend ended last year. As the number of contracts has rebounded, a growing market has emerged: Somali homebuyers seeking interest-free financing.
"Don't you want your own property ... a house your whole family can fit in?" says the website for C4D LLC, one of the largest contract-for-deed providers in Minnesota and whose site is in Somali and English. "Buying a house in the States normally asks you to pay interest. Or to have a good credit score. But you don't have to if you choose a contract-for-deed agreement."
Steven Legatt, a partner at C4D, said his business grew out of an existing market for car loans serving the Somali community. His company offers both interest-free and conventional contracts for deed, and he described his customer base as mostly Somali, including first-time homebuyers.
"They're generally large families, and a lot of them are bumping their heads in their rentals," Legatt said. "They wanted to put their money towards purchasing a house, not just renting."
The company purchases homes using mortgages from a conventional lender. Then, it sells the houses — often on the same day and at a higher price — to buyers through a contract for deed. It is one of several companies that Sahan Journal and ProPublica identified that flip homes in this way.
Jeff Scislow is a real estate agent who began advertising his contract-for-deed services on a Facebook page called "My Somali Home," since renamed "My Interest Free Home." While Scislow said he screens potential buyers and writes contracts with clear payment schedules, he knows other sellers don't.
He called the market in the Twin Cities "the Wild West."
In the background of all this: For decades, Minneapolis and St. Paul have recorded some of the biggest racial homeownership gaps among the nation's metro areas. According to the Urban Institute, a nonprofit research organization, 21% of all Black families in the Twin Cities own their homes, compared with 70% of white families. Research by the Amherst H. Wilder Foundation, a nonprofit community organization in St. Paul, estimates that only 10% of Minnesota Somali families own their home.
In 2013, Minnesota lawmakers, responding to a Star Tribune investigation, passed a law to curb the excesses of contracts for deed. The statute requires sellers who write more than four agreements a year to provide buyers with a notice spelling out the transaction's disadvantages. But the notice is just a list of recommendations and warnings; no state agency is tasked with enforcing it, and buyers have to sue the seller to trigger any potential penalties. The law also does not require sellers to verify buyers' ability to repay their debts.
Legatt said he typically attends closings to answer buyers' questions and tries to make sure the contracts are in his buyers' best interest. But, he said, he generally doesn't have a uniform process for screening buyers and doesn't verify buyers' incomes with documentation like paystubs, which is standard practice when getting a mortgage from a bank.
At a recent closing, he said, he had to explain to a potential buyer that they would not actually own the house until the contract was satisfied. He said that he provides an interpreter when needed.
"We have built our business the right way," he added in an email.
Under a contract for deed, buyers assume many of the risks and responsibilities of a traditional owner, and yet they can face terms that are harsher than mortgages.
Unlike a mortgage from a bank, which typically needs to be paid off in 15 or 30 years, contracts for deed often come due in five or 10 years; some contracts reviewed by ProPublica and Sahan Journal were even shorter. An assessment of the value of the house, known as an appraisal, is not required to determine the selling price. The buyer is responsible for all repairs and renovations, as well as insurance costs on the property.
"All the obligations of ownership come to you without really any of the benefits of ownership," said Ron Elwood, supervising attorney at the Legal Services Advocacy Project, the policy advocacy arm of Legal Aid in Minnesota.
The amount of the lump-sum, or balloon, payments, which can be tens or even hundreds of thousands of dollars, may not be spelled out in the contract terms; the payment dates may also be unclear. And sellers may expect these buyers to pay off the contract by obtaining a conventional mortgage for the remainder of the balance.
Some Somali contract buyers told Sahan Journal and ProPublica that they signed documents without reading them, relying instead on verbal explanations from people they thought were trustworthy.
Some of the lawmakers behind the 2013 legislation agreed that more needs to be done to protect homebuyers.
"We got the ball somewhat down in the field, to borrow a football analogy," said State Rep. Jim Davnie, a Democrat from south Minneapolis who sponsored the legislation. "Was it everything that was needed at the time? Probably not."
States like Arizona and Florida have laws affording buyers more protection, like a requirement that canceled contracts be handled through the foreclosure process. This gives the buyer more time to pay the overdue balance or at least some options to recoup their money.
"We need to think very hard about following some of these other states' leads and providing more protections and more balance in the statute to make it so that if the deal fails, it's not a total washout," Elwood said.
Some critics say Minnesota should take an even tougher stand against contracts for deed.
"It should not be legal, not this way, in Minnesota," said Shirwa Adan, the executive director of the Central Minnesota Community Empowerment Organization, a nonprofit serving the Somali community in St. Cloud. "It's targeting our community."
Wafiq Fannoun, the owner of a Minneapolis-based Islamic financial consulting business called Reba Free LLC, said Islam allows flexibility when a family is facing dire circumstances or when there are no alternatives. A handful of lenders in Minnesota offer Islamic or halal financing: loans that buyers can pay off through interest-free installments.
But some prospective buyers still can't qualify for those loans, which leaves contract for deed as one of their last options.
"Those people really need to make sure that in the process they are not being used or abused," Fannon said.
Once the truck driver and his wife decided to buy, they visited the same real estate agent his friend had used. The agent, Ismail Harun, showed them a newly constructed home and explained the terms of a five-year contract.
In the Somali community, business deals are sometimes struck verbally and reputation matters. The trucker liked what he heard. The real estate agent connected the trucker with the principal of an investment company called Banken Holdings LLC.
Chad Banken, of Banken Holdings LLC, is listed as the officer of at least four other companies that sell homes through contracts for deed. Taken together, his companies have sold at least 100 properties since 2019, according to property records, making him one of the largest contract sellers in the state.
Banken has been a figure in Minnesota real estate for more than a decade. In the 2000s, he was a defendant in two federal lawsuits filed by homeowners attempting to save their homes from foreclosure. According to the lawsuits, Banken's companies arranged to buy the homes and then resold them at a higher price to their former owners.
In both cases, the buyers fell into default but alleged they'd been misled — one of the cases was covered in 2006 by Minnesota Public Radio as an example of "mortgage foreclosure rescue" services gone bad. Banken denied misleading anyone and the lawsuits were settled. Banken did not return calls or respond to a detailed list of questions for this story.
Banken promotes his current contract-for-deed program on websites with names like "A Good Deed" and "Slow Flip LLC," which call contracts for deed a "forgotten tool." The sites say buyers must have 10% of the house price or $30,000 — whichever amount is larger — for a down payment; a "reasonable" income; and an "exit strategy" to pay off the contract at the end of its five- to 10-year term.
"Typically refinancing with a mortgage is the plan, but some exit strategies involve selling the property or making large periodic payments. Having a reasonable plan is critical to success with A Good Deed contract for deed," one site reads. "A relief for many buyers is that YOUR CREDIT SCORE IS NOT A FACTOR."
The truck driver bought his home according to Banken's script: On the day of the sale, Banken's company purchased the house using a conventional mortgage and then sold it to the trucker at a markup. The trucker and his wife put 10% down and agreed to monthly installments that were more than triple what they had been paying in rent.
The trucker said he believed that, if he worked longer hours and his wife got a job, they could swing the monthly payment, as well as make an additional $50,000 payment at the end of each year. But almost as soon as the family moved in, inflation hit the trucker's bottom line. The cost of diesel went up and the loads he was carrying got smaller, making the monthly payments a struggle. After the trucker read the terms of his contract again, he realized his debt was even steeper; he wouldn't be able to pay off the contract.
What's more, the contract included interest at a rate of about 6% — which defeated the main reason to use a contract for deed. After five years, he would still be more than $500,000 in debt, which would come due all at once.
At that point, if the family couldn't pay the balance or refinance, they could lose their home and have to walk away from nearly $300,000 in payments.
Since then, the trucker has been looking for help to get out of the deal. This summer, he and his wife walked into the Bloomington offices of Sakan Community Resource, a nonprofit that provides financial counseling and homebuying classes to the Muslim immigrant community. The trucker gave Executive Director Johanna Osman a copy of the contract he'd signed.
Although she'd heard from friends and colleagues that more and more Somali families were buying homes this way, it was the first contract Osman had seen with her own eyes.
"While I was reading, I was getting really angry," she said. "Oh, it was insidious."
The trucker also spoke to one of the banks in Minnesota that offer Islamic financing. But he said it turned him down because the price he'd agreed to pay for his house exceeded the appraised value.
"The problem is that the markup is just kind of a made-up number," said Wertheim, the attorney who specializes in contracts for deed. "The real disconnect is [the buyers] think: 'All right, I've done this deal. At the end, I will own it.' No, they won't. You've got a balloon. That's the problem, and it's made more difficult by the fact that you overpaid."
The trucker said his real estate agent, Harun, misled him about how the contract could be paid off in five years. Harun, who has sold multiple homes with Banken-backed contracts for deed, denied misinforming his clients and said he warns buyers that some contracts are overpriced and include interest. He connected Sahan Journal and ProPublica with a client who said that Harun explained the terms clearly.
"I can advise them, but I cannot force them. And I'm not here to make decisions on their behalf," Harun said. "Whoever's doing the loan, that's the person who has to explain to them what the terms are, what the down payments are, what the rates are, how they pay and all that stuff."
Osman said she is trying to work with families to bring complaints about predatory practices to the attorney general's office. Weli, of Isuroon, said her organization is building a legal team to help families who have bought through contracts for deed. But she added that many buyers are ashamed and afraid.
"These families are not talking. They're not talking. They're just disappearing," she said. "So then there's a lack of accountability."
On a visit this summer, the trucker stood in his finished basement gazing out onto the verdant backyard that he'd wanted so much for his children. The room was almost empty. He'd been so worried about losing their home that he stopped trying to furnish it.
Signing the contract, he said, was the biggest mistake of his life.
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