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The dangers of cheap foreclosures

April 18, 2017
An image of a home by 'Inspiration de' via Unsplash

Last night I decided to look at home prices while half-watching a bad reality show.

I wasn’t just looking at houses here in Dallas — I wanted to see what the markets in other cities were like.

One thing that struck me when I randomly decided to look up Detroit real estate was how many dirt-cheap houses there are.

A look at Detroit home prices.

A look at Detroit home prices.

Sure, many of the homes appeared to be in not-so-safe neighborhoods, but the cut-rate prices were amazing.

When I lived in Minneapolis, I had many friends who purchased foreclosures. Several low-income neighborhoods were even becoming de facto gayborhoods because of the influx of gay home buyers.

Some of my friends loved their homes. Others quickly realized that their houses were money pits.

Apparently the “money pit” scenario is not uncommon.

The New York Times characterizes the market for fixer-upper homes as “a trap for low-income buyers.” The situations covered by The Times article are specifically “contract for deed” sales, which are not your traditional bank-backed mortgages.

Here’s what happens: A private seller buys run-down or foreclosed houses at cheap rates and then sells them to buyers who otherwise cannot not get traditional mortgages.

The sale arrangement is something akin to a buying a home on a high-interest installment plan, but low-income buyers often are unable to make the costly repairs that these homes demand and keep up with their mortgage payments.

What happens next is the buyer defaults on the sale contract. The seller then takes back the home and finds a new victim buyer.

However, not all contracts for deeds end up poorly.

Some nonprofit housing programs use the contract-for-deed model to get low income buyers into stable housing. The goal for these programs is for the home buyers to eventually get a traditional mortgage through refinancing.

I have stayed away from purchasing real estate so far, but I plan to get a traditional mortgage if I take the plunge. That’s a few years off yet — so maybe the Detroit housing market will have recovered by then.

More: “Market for fixer-uppers traps low-income buyers,” Matthew Goldstein and Alexandra Stevenson, The New York Times


Photo: Inspiration de.

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