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Notes from the Field

Homestead Program Is a Land Contract Success Story

Land contracts, when appropriately administered, allow low-income individuals who might not qualify for conventional bank-financed mortgages a chance to become homeowners.

The views expressed in this report are those of the author(s) and are not necessarily those of the Federal Reserve Bank of Cleveland or the Board of Governors of the Federal Reserve System.

A land contract (also known as a contract for deed) is a special type of contract between a buyer and seller of a piece of real estate. With a land contract, the buyer acquires the immediate right to possession of a property, while the seller holds the property deed until the buyer has paid the agreed-upon sales price in full. Unlike a traditional mortgage, which is bank-financed, a land contract is financed by the seller of the property.

While the structure of a contract for deed varies by state, usually the buyer pays the seller an initial down payment and then makes monthly payments toward the purchase price plus interest for the duration of the contracted term. Though this method of purchasing a home has been seen as a bit controversial because it has historically lacked some of the buyer protections a traditional mortgage provides, when it is appropriately administered, it allows low-income individuals who might not qualify for a conventional bank-financed mortgage a chance to buy their own home.

Price Hill Will, a community development corporation (CDC) in Cincinnati, Ohio, is one such organization that is using this nontraditional method of home purchase successfully, offering contract-for-deed homes to qualified buyers through its Homesteading program. Rachel Hastings, executive director for Price Hill Will, discussed the corporation’s Homesteading program at a recent roundtable.

The Homestead program was created in the fall of 2015 as a way to match need with opportunity. The neighborhoods in which the program operates—Lower, East, and West Price Hill—have a considerable amount of vacant and blighted housing stock. However, many of the homes are salvageable; they just need repairs. Price Hill Will saw an opportunity to both mitigate blight and save houses by increasing homeownership opportunities for buyers who may have borrowing obstacles, such as credit restraints or provisional immigrant status, but who do have the financial means to buy a house and are willing to improve it via home improvement repairs and renovations.

So how does this process work? It begins with Price Hill Will acquiring a home—often by donation or at minimal cost—and it includes the help of several partnering social service agencies: Legal Aid, Catholic Charities of Southwest Ohio, LISC, Sisters of Charity, Santa Maria Community Services, Working in Neighborhoods, and the Port Authority of Cincinnati. The CDC evaluates the home’s major mechanical systems and ensures the house meets local building codes. Home buyers are screened by a partner organization, Santa Maria Community Services, and receive homeownership counseling from another partner, Working in Neighborhoods. The buyers are also evaluated for technical ability to ensure they can complete the additional repairs the home needs. Additionally, potential buyers must meet the following eligibility requirements:

  • Earn a minimum of $2,000 gross monthly income
  • Have a household income below 65% AMI (area median income)
  • Have a minimum of $1,500 in savings
  • Pay monthly installments of less than 25% of gross monthly income (Payment includes insurance and taxes)

Once a home and a buying family are matched, Price Hill Will writes a five-year, no interest land contract. As part of the agreement, qualified buyers have sweat equity tasks to complete, and Price Hill Will performs inspections every six months throughout the contract. After the terms of the contract have been met, the deed is transferred to the purchasing family.

Currently, there are six homes occupied by Homesteading families. Two homeowners have paid off their land contracts and own their homes outright. Six additional homes are being readied for new buyers.

Though the Homesteading program is an example of a successful program, land contracts have often been criticized for neglecting to protect the buyer. In Ohio, possible changes in land contract legislation aimed at protecting the potential home buyer are currently in process. In February 2019 a bill, the Fair Lending Through Land Contracts Act, was introduced that would dramatically alter Ohio’s land contract law. Among other changes, the bill declares that before a land contract is signed, the seller is required to provide evidence of title and verify that the property complies with local building codes.

Another condition of the Fair Lending Through Land Contracts Act is that an independent appraiser perform an appraisal on the property. Once the contract is signed, the seller is required to record a copy of the agreement, and the seller is responsible for the payment of taxes and insurance premiums. If enacted, the bill would protect the buyer in land contracts and require the contract seller to assume responsibilities typically regarded as duties of a landlord, not those of a home seller.

For Price Hill Will, the contract-for-deed model has worked quite well. Rachel Hasting sums it up nicely. “In 2015, we began piloting our Homesteading program as a new way to help very-low-income families, including those that are unbanked, become successful homeowners. Several years later, we’ve learned that our model creates positive outcomes for our homeowners—increased stability and the opportunity to build equity—while adding value to our neighborhoods.”