Tuesday Sep 26

The Resurgence of Residential Land Installment Contracts A Case Study of Harbour Portfolio Advisors’ Properties in Summit County, Ohio


I. Introduction

In the aftermath of the Great Recession, there has been a resurgence in land installment contracts for residential properties.1 Land installment contracts in the residential context operate as sort of a mixture of seller-backed mortgage and lease, but without the protections for the buyer that would be inherent in either. In a land installment contract, the buyer agrees to pay for the house, plus interest, over a period of years, living in the house while the seller retains the deed.2 Unlike a lease, the buyer is responsible for property taxes, insurance, and repairs.3 Unlike a mortgage, if the buyer falls even one month behind on their payments, the seller can evict them outright, rather than having to go through the more onerous process of foreclosure.4

Often marketed as a way for aspiring homeowners to purchase a house even if they do not qualify for traditional methods of credit, consumer advocates argue that land installment contracts are a form of predatory lending. 5

This is because an easy way to make money off of these contracts is to churn as many possible buyers through a property as possible, taking down payments, whatever monthly payments they can make, and their monetary and sweat equity investments in the property then, the moment they miss a single payment, evicting them to begin the process with a new buyer.6 Indeed, this was the business model of land installment contract sellers used to exploit black Chicagoans in the mid-20th-century.7

In the aftermath of the 2008 housing crisis, a number of companies purchased thousands of foreclosed properties cheaply and then began to offer them to buyers on land installment contracts.8 For instance, one of the largest players in this field, Harbour Portfolio Advisors, bought 6,700 properties, mostly from Fannie Mae’s bulk sale program, in states all over the nation including Ohio, Georgia and Pennsylvania.9 A lawyer for Harbour described their business model as selling “unproductive residential housing” to “other people who will make them productive again” 10 Consumer advocates, like the National Consumer Law Center, see it differently. They allege that Harbour Portfolio Advisor’s business model is the resurrection of the installment land contract schemes from mid-20th-century Chicago, but even more insidious as it is perpetrated by complex financial firms like Harbour rather than individual sellers. 11

Here, I examine Harbour Portfolio Advisors’s land installment contracts in Summit County, Ohio and use the data to suggest that, while Harbour is certainly not involved merely in making “unproductive residential housing” productive again, it is also not clear that they are involved in a mere resurrection of the same scheme perpetrated against African Americans in mid-20th-century Chicago. Instead, it appears that Harbour could be using land installment contracts as a method of circumventing traditional landlord-tenant protections, in particular the implied warranty of habitability, in order to offer substandard housing at low prices. That is, that the real product Harbour is offering may not be an opportunity to make “unproductive residential housing” productive again nor necessarily an attempt to cycle as many aspiring homeowners through their units to siphon off whatever money they can, but rather to offer rental housing at a lower price than is possible with residential protections like the implied warranty of habitability. To be clear, I do not intend to argue that the two schemes are mutually exclusive, or that Harbour is involved in only one or the other. It should also be clear that this is not a defense of Harbour. Using land installment contracts to rent properties to low-income tenants while circumventing tenant protections is hardly a good thing. The thesis of this paper is just that the data available from Summit County, along with disanalogies between the rental market in Chicago in the mid-20th-century and in modern day Summit, point to another business model that can be effectuated via land installment contracts.

To that end, in Section II, I give a quick background of the implied warranty of habitability as well as economic supply of low-income rental units while driving prices up. Finally, in Section III, I turn to a survey of the land installment contracts Harbour Portfolio Management has entered into in Summit County, Ohio. Using this survey, I argue that, for various reasons, that it is not clear that Harbour is currently involved in the Traditional Land Installment Contract Scheme (see Jack McNamara, Social Policy, v.46 #4). Instead, they appear to be offering substandard housing for rent, using land installment contracts to circumvent what would otherwise be their responsibility as a landlord.

II. The Implied Warranty of Habitability and the Low-Income Housing Market

Put most simply, the implied warranty of habitability reversed the common-law doctrine regarding residential leases that placed the responsibility for repairs entirely on the tenant. Instead, under the implied warranty of habitability landlords bear the responsibility for rectifying any defects in rental units, at least insofar as those defects are a major violation of the relevant housing code. Generally regarded as originating in the influential 197012 District of Columbia Circuit Court decision Javins v. First National Realty Corp.,14 most United States jurisdictions read leases as including an implied warranty of habitability.15

The justification for abandoning the common-law doctrine regarding residential leases provided in Javins 16 and substantially reproduced in the Restatement (Second) of Property was that the common-law doctrine was developed for a simpler, agrarian society.17 When the common-law doctrine was developed, residential units were usually freestanding, simple structures such that any defects were often apparent from a cursory inspection and within the ability of the tenant to rectify. 18 On the other hand, modern, urban residential units tend to be a portion of a building such that critical facilities, such as plumbing, are located outside of the unit and cannot be inspected during a mere walk through of the actual unit rented. 19 Moreover, even when a tenant can identify a defect in a modern rental unit, it often too complex for the tenant to be able to repair. 20 These issues were compounded by the fact that urban areas often had severe housing shortages, which led to an imbalance in bargaining power in favor of the landlord. 21 As such, it seemed unreasonable to suggest that urban tenants truly had the ability to bargain with the landlord over who should bear responsibility for repairs. 22

Critics of the implied warranty of habitability argue that it is actually detrimental to the lowest-income tenants. 23 By legally requiring that landlords maintain units to a minimum standard, the implied warranty of habitability raises the costs associated with providing housing. These costs are then passed on to tenants in the form of increased rent. The critics’ worry is that these raised rents will, in the best case scenario, merely increase the portion of the tenants’ income that is spent on rent and, in the worst case scenario, completely price certain tenants out of rental housing. 26

The implied warranty of habitability, according to critics, also adversely affects the supply of low-income housing.27 Charles J. Meyers suggests that rental housing prior to the adoption of the implied warranty of habitability could be broken up into four broad categories. 28 The first is composed of units that comply with local housing codes and, thus, would be unaffected by the adoption of the implied warranty of habitability.29 These units would remain on the market at the same price. 30 The second category are units that currently do not comply with housing codes but can be brought into compliance with minor repairs that can be easily recovered by increasing the rental price of the units. 31 After the adoption of the implied warranty of habitability, these units would remain on the market, but at the higher rent required to cover the costs of repairs meaning that the previous tenants would either be forced to pay a higher proportion of their income to remain in the unit or move to a cheaper one. 32 The third is composed of units that would cost more to repair than could reasonably be covered by raising their rental price, but not so much so that the landlord is losing money keeping them on the market. 33 After the adoption of the implied warranty of habitability, previous tenants in this class of units are presumably subject to the same consequences as those in the second group as their rents will be raised to some extent. However, they benefit more substantially because, as the market will not bear the full rent increase necessary to compensate the landlord for the repairs, the landlord is forced to pay for some of the repairs out of pocket. 34 However, as the costs of operating this category of housing are higher for the landlord and the margins thinner, Meyers argues that no new housing of this category will be built and that, as these buildings age, the cost to maintain them will increase eventually forcing landlords to remove them from the market. 35 The fourth and final group is composed of units that are so wildly out of compliance with housing code that the costs of bringing the units into compliance are so substantial that the landlord would expend so much money repairing them that any feasible increase in rental costs would still result in a net loss for the landlord. 36 After the adoption of the implied warranty of habitability, these buildings will be fairly quickly removed from the market. 37

It is worth noting that it is simply unclear to what extent empirical evidence actually supports these criticisms of the implied warranty of habitability.38 However, this is partially because the statistics regarding housing in the period following the widespread adoption of the implied warranty of habitability are affected by a number of other demographic changes (e.g.: falling demand caused by rising preferences for homeownership as opposed to renting).39 Thus, it is hard to tell from available statistics exactly what impact of the adoption of the implied warranty of habitability alone had on rental markets. 40 However, it is plausible that it cause some drop in the supply of rental housing as well as an increase in price in the remaining stock, even if the extent of its effects are unclear. 41

III. Harbour Portfolio Advisors’ Land Installment Contracts in Summit County, Ohio

a. Why Harbour Portfolio Advisors and Summit County, Ohio?

Harbour Portfolio Advisors is a particularly good subject for a case study for two reasons. One is that it is one of the largest players in this area of the real estate market.42 Two is that, unlike its competition, e.g. Vision Property Management, Harbour tends to file their land installment contracts with the appropriate county recorder’s office. Summit County, Ohio is the site of the case study for this paper for a few reasons. The first is that it is one of the locations where Harbour Portfolio Advisors is active.44 The second reason for focusing on Summit County is that, unlike other counties where Harbour is active, their recorder’s office is accessible online rather than in solely in person.

b. Methodology

I examined all forty-three unique land installment contracts available through the Summit County Recorder’s Office. The earliest was filed in November of 2010 and the most recent was filed in February of 2017.

All of the contracts, except for the most recent contract filed, were identical in content and form except for names, addresses and amounts. They were all for a term of thirty years and had an interest rate of ten percent. The most recent contract is no longer of the same form and has slightly different terms, but retained both the term of years and interest rate.

In each contract, the amount that the buyer was obligated to pay per month was dictated by a “promissory note” apparently executed at the same time as the contract. With the exception of the very first contract
filed in November of 2010 for 1276 Pondview Avenue, this “promissory note” or “purchase money note” was not included in the documents filed with the Summit County Recorder’s Office. This presented an issue in determining exactly how much each buyer was obligated to pay per month under the terms of the land installment contracts. However, in the 1276 Pondview Avenue contract, I noted that the amount payable under the “purchase money note” was the same amount down to the cent ($351.03) as the rent the buyer is obligated to pay under the land installment contract if the agreement is terminated and the buyer becomes a month-to-month tenant. Accordingly, I inferred that this amount, referred to in the body of all of the other contracts, was the same amount as the monthly payment required in the omitted “purchase money notes”.

In the chart to above, I provide the address each contract refers to, the total purchase price of the property, the monthly payment required by the buyer and then offer a comparison to the current rent of the nearest available house for rent on Zillow.com as well as the lowest-priced, currently available single apartment in all of Summit County, Ohio also on Zillow.com. Moreover, the median gross rent (rent plus average monthly cost of utilities and fuel) in Summit County, Ohio from 2011 to 2015 according to the U.S. Census is $744.45

c. Analysis of data

The thing that stands out most from the survey of Harbour Portfolio Advisors’ land installment contracts is that in every case the monthly payment under the terms of the land installment contract is cheaper than the price per month to rent the nearest available house. Often it is substantially so, as the rental prices of nearby houses range from a little less than double to more than four times the price per month under a Harbour land installment contract.

Even more striking is that only eight of the forty-three contracts have a per-month price that is more than the per-month price to rent the cheapest available apartment in all of Summit County, Ohio. In those eight cases, they cost at most about seventy dollars more per-month than the apartment. Although, this does not factor in the often-considerable costs associated with a land installment contract that can arise from taxes, insurance, and repairs, the “sticker price” for a house via land installment contract appears incredibly low. In addition, the apartment in question is 300 square feet, whereas even some of the cheapest Harbour properties are three or more times larger than that. For instance, the property that costs almost seventy dollars more a month than the apartment includes a 1,176 square foot house on a 6,300 square foot lot.

All of the per month prices for the Harbour properties are also considerably lower than the median gross rent for Summit County, Ohio during the relevant time period, which was $744.49  Again, this comparison is somewhat inexact as the price of the Harbour properties does not include utilities or fuel whereas the median gross rent does and, under the Harbour contracts, the buyer is responsible for all repairs, insurance and taxes.

Finally, in the period from November of 2010 to February of 2017 only six of the Harbour properties in Summit County were the subject of more than one land installment contract. Of these properties, none have been the subject of more than two. Unfortunately, absent further research, the import of this data point is unclear. The data at hand shows that at least six of the forty-three land installment contracts in this period were terminated as the properties were the subject of a subsequent land installment contract. However, this does not mean that they were the only land installment contracts that were terminated. It is possible that any of the other thirty-seven land installment contracts have been terminated, either by forfeiture or conversion to month-to-month tenancy, but that Harbour has not entered into a subsequent land installment contract.

Keeping this limitation in mind, I propose that there are a few factors that could explain the limited number of times that the Harbour properties in Summit County have changed hands. The most straightforward is that, given the low monthly price of the contracts, even with the hidden costs of property tax, insurance and repairs, the buyers are unlikely to miss a payment. Another is that Harbour is, for various reasons, loath to exercise their contractual right to forfeiture, preferring to keep buyers in the property as long as possible in the hopes of receiving whatever payments they are capable of making. Indeed, anecdotal evidence suggests that companies involved in this business are willing to negotiate forbearance in certain cases.50 A final reason, which could either explain why Harbour is loath to exercise their contractual right to forfeiture or, alternately, simply why they have not been able to execute new land installment contracts despite evicting previous buyers, is that the market for housing in Summit County is weak and there is a dearth of buyers willing to enter into land installment contracts.

Indeed, this latter point is one that is worth considering when looking to compare Harbour Portfolio Advisors’ business model with the Traditional Land Installment Contract Scheme. At the time the Traditional Scheme was developed in Chicago, there were a considerable number of distorting influences on the demand for rental housing amongst African American homebuyers and renters in Chicago. First, because of the influx of migrants from the South to Chicago, there were many people looking for housing. Second, because of racially restrictive covenants and the actions of the FHA, the area in which they could rent was artificially restricted
to small areas of the city. Finally, as the FHA rarely backed mortgages in redlined neighborhoods, it was unlikely that African American homebuyers could purchase a home through traditional methods. The only one of these three features that has significant parallels in modern day Summit County is the third, in that communities of color were the subject of subprime mortgages which resulted in destroyed credit after the foreclosure crisis which would preclude them from receiving home financing through traditional means.51 It is plausible that this would increase the demand for alternative paths to homeownership, like the land installment contract, amongst people whose credit was destroyed during the 2008 housing crisis.

But it was not simply demand for alternative methods of financing homeownership that enabled the Traditional Scheme to operate. In order to make kicking a buyer out of a property on the first payment a viable business strategy for the seller, the seller would have to be reasonably certain that they could find a new buyer in short order. Without a land installment contract buyer in a property, the seller is not only making no income off of that property, but also incurs costs since property taxes and code violations are the responsibility of the seller absent contractual provisions to shift that responsibility to the buyer. In Chicago in the mid-20th century, sellers had no problem finding new buyers with the increased demand for housing from an influx of African American migrants as well as the decreased supply of housing for those very migrants
caused by racially-restrictive covenants. It is not clear if the market for housing in Summit County, Ohio is good enough to take the gamble on finding another buyer.

If it is the case that there are not enough buyers ready and waiting for any available Harbour property and, therefore, conditions are not right for the Traditional Scheme, then the question is: what is the new scheme? Harbour Portfolio Advisors managed to raise more than $60 million from investors, who presumably are interested in a return on their investment.52 One possibility is that they are acting as a home rental agency that can avoid the costs Meyers argued were associated with the implied warranty of habitability and, thus, can offer de facto home rentals at a cost much lower than de jure landlords.

One way of thinking of Harbour Portfolio Advisors’ position upon purchasing thousands of foreclosed upon homes is by analogy to a landlord of substandard housing at the adoption of the implied warranty of habitability. Presumably, some of the homes are in good condition and could be rented or sold without investing any money in repairs. But the rest are in various states of disrepair. However, with thousands of homes purchased for cheap in bulk, it would be expensive to conduct an independent inspection of each home to determine which are in good condition and which are not. Moreover, those that are not up to code are split up between Meyers three categories, meaning that while some can be sold or rented at a profit even with repairs, some will be a wash with repairs and some will be an outright loss even with repairs. Again, to determine which are which would require inspection then actual repairs, all of which could be expensive. Instead, what they can do is offer up all of these houses, regardless of condition, for purchase under land installment contracts. This means that not only are inspections of the houses unnecessary before the buyers move in, they also are not responsible for any major violations of code that occur during the course of the contract, as they would be if they were a traditional lessor.

This also helps explain the 30-year term of the land installment contracts. Under the Traditional Scheme, where the goal is to siphon as much money out of the buyer as quickly as possible, a shorter-term with higher payments per month allows for more money to be drained from the buyer as well as significantly increasing the chance the buyer will default. On the other hand, a longer-term contract actually decreases the financial strain on the buyer, making it more likely that the buyer will be able to afford both the monthly payment and whatever payments are required in the form of taxes, insurance, and repairs. Decreasing the chances the buyer will default is only desirable if you intend for the buyer to stay as long as possible, as a landlord might prefer as long as a tenant can keep paying.

The fact that monthly payments are so low as to be competitive with the cheapest apartments in all of Summit County also helps attract buyers to these contracts. Given the choice offered above between a 300-square foot apartment for $325 a month and a house for as low as $141.84 a month, why would anyone take the former? Of course, there are more hidden fees that come from buying a home under a land installment contract than come along with traditional renting. Taxes and insurance are unavoidable. However, to some extent, repair costs can be deferred, provided the issue is not too grievous. Moreover, for less legally sophisticated renters, who are themselves unaware of the implied warranty of habitability and are often unable to bear the cost of moving apartments, there is always the chance that the responsibility for repairs has been placed onto them by unscrupulous landlords anyway. In that case, the choice between paying for repairs in a market-rate apartment and paying for repairs in a home that they have at least some chance, even if it is a long shot, of owning might seem like a good one.

IV. Conclusion

Thinking about the new wave of land installment contract purveyors as simply a resurgence of the Traditional Land Installment Contract Scheme, where the goal is to churn through as many buyers as possible,
is a potentially simplistic view of the phenomenon of residential land installment contracts.

Of course, there are reasons to doubt the foregoing argument. One is that Harbour Portfolio Advisors does consider itself, and advertises itself, as being in the business of rent-to-own homes. However, the point is not that Harbour Portfolio Advisors, and other companies like it, are necessarily involved in offering units via land installment contract purely to circumvent the implied warranty of habitability, but rather that there are significant differences, both historically and economically, in the conditions that exist today and those that enabled the Traditional Land Installment Contract scheme, that deserve careful analysis in order to determine what companies like Harbour are really up to.

Luke Dowling is currently a student enrolled at Harvard Law School.

End Notes

1. JEREMIAH BATTLE JR. ET AL., TOXIC TRANSACTIONS 2 (Nat’l Consumer Law Ctr. ed., 2016).
2. Grant S. Nelson, The Contract for Deed as a Mortgage: The Case for the Restatement Approach, 1998 B.Y.U. L. REV. 1111, 1112 (1998)
3. Id.
4. Id.
5. See BATTLE ET AL., supra note 1, at 9.
6. Id. at 2
7. See Contract Buyers League v. F&F Inv., 300 F.Supp 210 (N.D. Ill 1969).
8. Alexandra Stevenson & Matthew Goldstein, Market for Fixer-Uppers Traps Low-Income Buyers, N.Y. TIMES, Feb. 6, 2016 at A1.
9. Id.
10. Id.
11. See BATTLE ET AL., supra note 1, at 2.
12. Edward H. Rabin, The Revolution in Residential Landlord-Tenant Law: Causes and Consequences, 69 CORNELL L. REV. 517, 521 (1984).
13. Id.
14. 428 F.2d 1071 (D.C. Cir.), cert denied, 400 U.S. 925 (1970).
15. Rabin, supra note 6, at 522
16. 428 F.2d 1071, 1074 (D.C. Cir.), cert denied, 400 U.S. 925 (1970).
17. RESTATEMENT (SECOND) OF PROPERTY §5.1 cmt. b (Am. Law. Inst. 1977).
18. Id.
19. Id.
20. Id.
21. Id.
22. Id.
23. See generally Charles J. Meyers, The Covenant of Habitability and the American Law Institute, 27 STAN. L. REV. 879 (1975).
24. See Rabin, supra note 6, at 558.
25. Id.
26. See Meyers, supra note 12, at 893-98.                                                                                                                                                                                                                                                     27. Id. at 889.
28. Id.
29. Id.
30. Id.
31. Id.
32. Id. at 890.
33. Id. at 889.
34. Id. at 890.
35. Id.
36. Id.
37. Id. at 890.
38. Compare Charles J. Meyers, The Covenant of Habitability and the American Law Institute, 27 STAN. L. REV. 879, 902 (1975) with Edward H. Rabin, The Revolution in Residential Landlord-Tenant Law: Causes and Consequences, 69 CORNELL L. REV. 517, 562-77 (1984).
39. Rabin, supra note 6, at 578.
40. Id.
41. Id.
42. Stevenson & Goldstein, supra note 10
43. Phone conversation with Wade Rathke
44. BATTLE ET. AL., supra note 1, at 2.
45. U.S. CENSUS BUREAU, Quick Facts: Summit County, Ohio (last visited Apr. 28, 2017), https://www.census.gov/quickfacts/table/HSG010215/39153#
46. Refers to nearest house available to rent on Zillow.com accessed on 4/23/2017
47. Refers to nearest house available to rent on Zillow.com accessed on 4/23/2017
48. Refers to nearest house available to rent on Zillow.com accessed on 4/23/2017
49. U.S. CENSUS BUREAU, supra note 71.
50. Phone conversation with Wade Rathke BATTLE ET. AL., supra note 1, at 4. Stevenson & Goldstein, supra note 10


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