“On Contract- As Is”

                                               “On Contract- As Is”

By Albert B. Kelly

At some point in our lives, we’ve all purchased something on an “as is” basis; meaning you buy it knowing full well that you’re getting whatever warts and blemishes there are- you’re getting it “as is”. I suppose that’s fine if we’re talking about at a garage sale- not necessarily so when we’re talking about a home.

According to a recent editorial in the NY Times, homeownership through contract is making a comeback. If you’re not familiar with the practice, it’s where a seller gives the buyer a high-interest loan on which they make monthly payments, all with the understanding that after 20, 30, or 40 years they would own the home.

But here’s the thing, buyers build no equity, they have all the responsibility of homeownership- meaning the costs for repairs- with none of the benefits of ownership, and they can be thrown out of the home for even a small breech of the contract.

Back in the 1940’s and 50’s “on contract” was used by many as a way to exploit low income families and minorities who couldn’t get traditional mortgages. Investors would by houses at a very cheap price and sell the house “on contract” to these families for triple the assessed value.

Buyers had no equity and in addition to hefty down payments and inflated monthly payments to the seller, they were responsible for all repairs. If they got behind in payments, even slightly, they would be evicted, lose everything, and the cycle would start again with another family “on contract” in the same house.

In this way, a single property could become a cash cow as families, unable to access credit and mortgage products in the traditional market, turned to the “on contract” approach as the only way they had a shot of owning a home.

Today according to the editorial, it’s the investment firms buying up large portfolios of foreclosed houses and selling them “on contract” and “as is” to those who can’t qualify for traditional mortgages.

Here’s the rub though- the same investment firms doing this “on contract” scheme are the same shifty white collar outfits that were peddling subprime loans in the housing market that nearly destroyed the financial system.

According to the editorial, contract for deed allows for price gouging because unlike traditional mortgages, “on contact” requires no appraisal, no inspections, nonrefundable down payments, and quick evictions for missed payments.

Under traditional mortgages, appraisals are required to ensure a relationship between the loan and the actual value of the home and equity remains with the buyer-homeowner. In addition, inspections are required to ensure code compliance. If a homeowner gets behind, there are built in opportunities to get caught up and avoid foreclosure.

A traditional rental arrangement even has more protections than an “on contract-as is” deal. The tenant from hell notwithstanding, a security deposit is refundable if a tenant holds up their end of the bargain and while tenants can be charged for certain repairs caused by their own negligence, major stuff is generally the responsibility of the landlord.  

This “on contract” or “contract for deed” approach is an area that is ripe for regulation. Just as New Jersey has a robust tenant-landlord law in place, our state legislators should consider building in protections for consumers buying homes under a contract for deed model.

This might include some type of provision so that contract amounts bear some relationship to the actual value of the home and some type of minimum standards when it comes to the condition of a home. Finally, any regulation or oversight should include modest protections- similar to those afforded homeowners paying mortgages or those paying rent- should they fall behind.

I don’t think having measures in place is wholly unreasonable. And given the history of how banks, investors, and the real estate industry back in the middle part of the 20^th century exploited low income families to enrich themselves, it’s the right thing to do.

Though today, it’s not just low income families or even minorities- many solid middle class families were devastated by the sub-prime mess and the recession that followed the bubble and while it was not quite as prevalent as in low income communities, the impact was no less real.

The fat cats that bet against the housing market back then should not now be allowed to exploit the very people they victimized a decade ago by selling them today’s table scraps “on contract” and “as is”. We need more oversight in NJ.