Alternate names: home installment contracts, contracts for deed, land sale contracts
For example, say you found a house you wanted to buy for $250,000. The seller tells you you’ll need to enter into a home installment contract. The contract requires you to make a $12,500 down payment, and it says you do not get the deed to the home until you pay off the entire $250,000. Per the contract, the seller keeps the deed to the house while you make payments. Around two years into the contract, you lose your job and miss a mortgage payment. Per the contract, the seller evicts you and you lose your down payment and all monthly payments.
How Does Contract Buying Work?
The key to contract buying is that the person selling the home keeps the deed. The buyer doesn’t have any ownership rights over the home. The money they pay for a down payment and rent goes straight into the seller’s pocket. No equity is built, and the buyer does not have the right to sell the home. The buyer, in theory, doesn’t get ownership of the home until the terms of the contract are met. Normally, you get the deed to your house whenever you close the purchase of the home. That deed gives you the right to keep, sell, or rent the house, and it allows you to build equity in your home. You can’t be kicked out of your home for one late mortgage payment, either. And because you have the deed to your home, you have the right to sell your home and pocket the proceeds of the sale, minus what you owe on your mortgage. Contract buying was the opposite. It masqueraded as a mortgage, but came with no financial or legal protection; contract sellers worked outside housing regulations. Since the seller owned the deed, they could evict the buyer at any time, often evicting buyers for even one missed payment. As a result, the evicted buyer would lose all the money they put into a down payment and monthly payments, leaving them without a home and at a significant financial disadvantage.
Contract Buying’s Impact on Black Homebuyers
Contract buying was used as a way to keep Black homebuyers out of the housing market, and in the 1950s and ’60s, it worked in tandem with the federally-endorsed practice of redlining. Redlining involves denying a creditworthy applicant a home loan in certain neighborhoods, and it was used to deny homeownership to Black homebuyers. As a result, those homebuyers were left with few options to finance a home, while White homebuyers did not face the same impediments, a Duke University study about contract buying noted. “So while white Americans were buying homes financed with bank loans insured by the federal government and protected by regulation, building equity as they paid down mortgages, and receiving titles at purchase, federal policy and banking practices pushed black Americans into a secondary, unregulated market that often left them stripped of any wealth they had accumulated—or hoped to accumulate—through home ownership,” the study said. “In this policy context, sellers and speculators in local housing markets exploited black families eager to buy homes. These families had few options other than purchasing ‘on contract,’ a sale product that cleverly offered the illusion of buying a home.” The home prices were usually inflated in the era of contract buying, too, adding another expense to the Black homebuying experience. Homes sold on contract had an average price makeup of 84%. On average, borrowers buying a house on contract paid around an extra $670 (in 2022 dollars) each month. And with that higher home price came higher insurance payments and property taxes, further hurting the homebuyer’s finances. Furthermore, many Black homebuyers could not afford an inspection or appraisal. As a result, they unknowingly moved into homes that were overpriced and in need of repairs. The buyer paid the repairs out of pocket, further draining their finances, while the seller continued to rake in monthly payments. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
