Minnesota attorney general opens investigation into contract-for-deed real estate practices

The Minnesota Attorney General's Office is investigating potentially exploitative real estate transactions that have targeted Somali and Hispanic immigrant homebuyers in the state.

The attorney general's action follows a report by ProPublica and Sahan Journal last year that revealed how contracts for deed — an alternative home sale agreement made directly between a seller and a buyer — can lock purchasers into inflated prices and unfavorable terms, and sometimes lead to eviction and the loss of their life savings.

"We have received a high number of complaints about predatory lending practices," Mark Iris, an assistant attorney general in the office's civil rights division, said in a statement. "Our office is concerned with the potential for abusive lending tactics that extract wealth from already impoverished communities."

The Sahan Journal-ProPublica investigation identified a rising market in and around the Twin Cities for contract-for-deed sales, particularly in the Somali community. Many buyers in the East African Muslim community avoid paying or profiting from interest because of their religious principles. Investors have been offering them contracts for deed as an "interest free" way to purchase a house and sidestep a traditional bank loan.

But several Somali homeowners said they purchased homes without understanding their contracts, which included huge down payments and balloon payments, some of which soar into the hundreds of thousands of dollars. The homeowners said they had been misled, and they told reporters they feared having to walk away from their homes and the money they'd invested.

Contract-for-deed home sales lack many of the consumer protections of a bank-backed mortgage loan. Homes can be sold for tens of thousands of dollars above their current market price, which makes them difficult to resell or refinance. If the purchaser misses a payment, the seller has the power to evict in as little as 60 days.

Based on the reporting, Sen. Tina Smith, D-Minn., convened a Senate subcommittee hearing in July on the issue, characterizing the contracts as "designed to fail." She and other senators called for more consumer protections.

Home sellers and investors who use contracts for deed say that they provide a needed, alternative pathway to homeownership for some buyers, and that, when properly used, the transaction is a safe financial instrument. They deny abusive practices.

While contracts for deed are legal, sellers can run afoul of the law by charging excessive interest rates, targeting minority groups with unfair contract terms or using deceptive tactics to lure buyers. The attorney general's office declined to say what, specifically, officials are investigating. In addition to complaints from the Somali community, Iris said, the attorney general's office has received a large number of reports of questionable practices being used within the Hispanic community.

Mohamed Goni, executive director of the Central Minnesota Community Empowerment Organization, said he has heard about allegedly deceptive tactics used by some contract sellers. Goni's organization is a nonprofit serving the Somali community in St. Cloud, about an hour northwest of the Twin Cities.

"It's a way of robbing or putting people into more poverty," he said. "In central Minnesota specifically there's a huge, huge housing problem, so it's really encouraging to see the AG stepping in and doing an investigation."

Stories about problematic contract-for-deed practices have been around for years, said Jessica Aliaga-Froelke, CEO of Hispanic Solutions Group in Bloomington. Several Hispanic clients told her they bought homes using a contract for deed because they had bad credit, could not get traditional mortgages or did not have Social Security numbers.

Aliaga-Froelke said the buyers were led to believe that after making huge cash payments for a period of time, they could refinance their loans at a later date.

"They are told, 'Here, you can have your house,' but technically they don't know what they're signing," she said. Contract-for-deed sellers "know these people will never be able to refinance with a bank."

Roxanny Armendariz, a financial counselor with Neighborhood Development Alliance in St. Paul who also works primarily with the Hispanic community, said she hopes the attorney general looks into the role that real estate agents play in pushing buyers toward contracts they can't afford. Real estate agents sometimes connect homebuyers who don't qualify for a bank loan with investors who do contract-for-deed sales in bulk. The investor purchases the home through their business or limited liability company, then resells it to the buyer at a price markup.

"They do want to hold these LLCs responsible, but what about the realtors involved? That is the piece that needs to be called out," she said.

The attorney general's office declined to provide further details about its investigation. The office said anyone wishing to submit a complaint about contracts for deed can fill out its Tenant Report Form online, or call 651-296-3353 or 800-657-3787.

This story was produced in collaboration with ProPublica, a nonprofit newsroom that investigates abuses of power.