Much love to Allie Gross for another fabulous piece of reporting.
She should interview
Bert Johnson when he gets out of prison for the holidays to get more, detailed information on how these fake land contracts and fake LLCs were stealin'.
I believe he is a subject matter expert.
Oh, and so is
Adam Hollier.
A lawsuit filed in federal court this week takes aim at Michael G. Kelly, one of the top landowners in Detroit, over contracts for housing that the suit calls "predatory."
The suit filed Monday by Mantese Honigman and Michigan Legal Services seeks class-action status and alleges that Kelly and four other defendants lured unassuming and vulnerable Detroiters into a "real estate bait and switch" in violation of the Truth in Lending Act and the Home Ownership Equity Protection Act.
At the crux of the complaint is the use by Kelly — and the various LLCs associated with him such as Detroit Property Exchange — of contracts that seem to operate outside of federal regulations, contracts Joe McGuire, an attorney at Michigan Legal Services who focuses on housing issues in Detroit, says are actually land contracts, which would have some consumer protections.
"The question that this litigation raises," said McGuire, "is can a property like Detroit Property Exchange get around the regulations that were passed by Congress specifically to address predatory lending, like this, simply by renaming the agreement to something other than land contract?"
The Detroit Free Press reached out to Kelly for comment via the Detroit Property Exchange but did not hear back.
Land contracts are popular home-buying tools in Detroit where mortgages have historically been hard to come by. They often operate in a nebulous legal space and leave little protections for buyers (called vendees). They also often result in evictions.
But, according to McGuire, a general land contract pales in comparison to the vague and confusing agreements Kelly uses in his land deals.
"Often, when people hear about land contracts, if all they're used to is your conventional mortgage, they are struck by how much worse a land contract is in the way it's written," McGuire said. "They balk at the idea that you only get your deed when it's paid all off, and that there is no appraisal required, no inspection in the law. But these agreements (used by Kelly) make land contracts look amazing."
According to the complaint filed in U.S. District Court for the Eastern District of Michigan, the deals would work like this:
- Kelly (or one of his companies) would purchase homes, often sight unseen, at the Wayne County Tax auction for a low price. The homes are usually dilapidated.
- After attracting a potential buyer, Kelly (or one of his companies) would have them sign an "ambiguous, opaque contract" with a high interest rate.
- Under the contract, the purchaser would be under the impression that after several years of payments they would own the property, and that in the interim, as the future owner, they would be responsible for fixing up the property.
- When the buyer "inevitably" got behind on payments "due to their general lack of an ability to pay back the loan," Kelly (or one of his companies) would evict the purchaser as a tenant, rather than a land contract vendee, who would have more time to catch up on payments before being evicted.
- The tenant's eviction would go unquestioned because of the contract's "intentional use of ambiguous, confusing, cherry-picked language." Adding to the chaos is the fact that purchasers would have typically signed two documents when committing to the property: a "Lease with Option" and "Real Estate Purchase Agreement." One makes the customer a tenant; the other makes them a purchaser — together they created confusion.
- Once the "purchaser" had been evicted, the complaint alleged that the scheme would begin again with a new potential buyer.
While the complaint states the deals were predicated on buyers never actually getting the property, a land contract-like agreement was used instead of a rental agreement because it was more lucrative for the defendants.
Michigan law prohibits landlords from collecting a security deposit greater than 1.5 times the monthly rent, but the seller of a land contract can ask for a "nonrefundable down payment" at a cost far greater to the purchaser.
"Defendant sold plaintiffs and the class members home ownership but evicted them as tenants," the complaint said, noting that Detroit Property Exchange, one of Kelly's businesses, has a ratio of 1.49 "evictions" for every property in their portfolio.
Ultimately, according to the complaint, the contracts acted as "high-cost mortgages" and served to originate loans (the monthly bills "buyers" received often had "loan numbers" on them).
Because of this, the complaint states, the Truth in Lending Act — a 1968 federal law aiming to protect consumers in dealings with lenders and creditors — and the Home Ownership Equity Protection Act — a 1994 amendment to the Truth in Lending Act that tackles abusive practices with high-interest rates — should apply.
And because many of the potential buyers could not reasonably make the monthly "rent-to-own" payments — and no consumer financial data was reasonably collected or analyzed — the complaint states the land contracts were ultimately predatory.
The four other defendants are entities Kelly uses for his land contract business — Detroit Property Exchange, Suena Homes Realty LLC and Homes of Detroit LLC — and Crystian Segura, a licensed real estate agent and property manager for a Kelly real estate company.
The representative plaintiffs are Natalie James, Jerome Day and Carl Austin. All three entered into contracts with the defendants. The complaint seeks class-action certification and the plaintiffs are requesting a jury trial.
A costly route to home ownership
In the United States, land contracts — also known as a contract for deed — were popularized between the 1930s and 1960s as a tool for African-Americans who were prevented from accessing traditional mortgage loans to buy homes.
It is estimated that in Chicago during the 1950s, 85 percent of properties bought by African-Americans were purchased using land contracts.
While land contracts have ebbed in popularity over the decades, especially following the subprime foreclosure crisis that placed constrictions on mortgage lending, they've seen a resurgence as a tool for individuals who cannot obtain conventional home financing.
This is particularly the case in Detroit, but how many have been issued over the years is not known because Michigan law does not require land contracts to be filed with any governmental entity.
"Land contracts can be so pernicious — there is no filing requirement, there is just no regulation on them," Peter Hammer, director of the Damon J. Keith Center for Civil Rights at Wayne State University Law School, said this summer for an article on property speculation in Detroit.
"They can just exist in this completely private space."
Under typical land contracts, the seller holds the deed to the property until the contract — a certain purchase price at an interest rate over a series of years — has been fulfilled. Despite not having a legal title to the house, the buyer, or vendee, is typically obligated to pay property taxes, obtain homeowners insurance and make repairs.
Language within land contracts varies, but it typically includes, as explained in the complaint, vague wording that favors the seller.
"If the buyer defaults during the term of years, the contract usually purports to allow the seller to cancel (or "forfeit") the land contract, keep all payments made by the buyer and evict the buyer through a forfeiture proceeding," the complaint explains.
Land contract forfeiture actions give a vendee 90 days to repay what is owed (180 days if they've already paid 50 percent of the purchase price by the time the case goes to court).
But Kelly has treated the agreements he has made as tenant-evictions, the complaint states, which give tenants only 10 days to pay what is owed.
Ultimately, the complaint states, the agreements — despite their names — are land contracts.
"The reason that these are land contracts, despite the fact that they slapped a different name on top of it," McGuire said, "is they operate exactly like land contracts."
He said that following the housing crisis, regulations were passed targeting land contracts.
As a reaction, those utilizing them began to call them something else.
“It’s pretty common knowledge that this is what drove a lot of these companies that were former land contract sellers to instead start calling these contracts 'lease with option to buy' or 'rent to own' instead of land contracts,” McGuire said.
But, he added, "if you look at the paperwork Detroit Property Exchange gives these customers, they have amortization schedules, they have statements that refer to a loan number, they have (an) interest rate and how it’s being applied to the purchase price; they even in one case ... gave the customer the required IRS form for writing off mortgage interest on income taxes," said McGuire.
"Everything they're giving the customer gives them the impression that they're buying property," McQuire continued. "And ... from what I've heard, when the customer is going in, the agreements are referred to as land contracts. You're told you're buying a property."
They therefore should be subject to federal consumer protection laws that require certain disclosures and evaluations around a customer's ability to repay the loan, the complaint states.
Exploiting buyers
"For buyers, the land contract represents an opportunity to own their homes," Josh Akers, assistant professor of Geography and Urban Regional Studies at the University of Michigan-Dearborn, and Eric Seymour, a postdoctoral research assistant at Brown University, wrote in a 2018 paper on land contracts that the complaint cites. "For unscrupulous agents, it is an opportunity to profit through exploitation and eviction."
In 2017, efforts to regulate land contracts never came to be, according to Lorray Brown, co-director of the Michigan Law Poverty Program, who was working on draft legislation.
"The draft legislation never made it out of the work-group meetings" as there was a lot of opposition "from the industry folks," Brown said this summer, noting that she has seen a number of private investors purchasing uninhabitable and dilapidated foreclosed homes and selling them to consumers under land contracts.
"These land contracts are predatory because they are set up to fail," she said, explaining that the contracts often require consumers to take on all of the obligations of a homeowner with none of the rights.
"The terms of the contract require the consumer to fix up the property within a reasonable time. Then there is usually a provision that says if the consumer fails to comply with any of the provisions, the contract will convert to a month-to-month tenancy and the seller will terminate the contract. The seller then takes back the property through eviction and the consumer loses all of the money invested in repairing the property," Brown wrote.
| Name | Company | Pipeline | Properties |
|---|
| John Hantz | Hantz Farms | Tax Foreclosure | 1,941 |
| Manuel Moroun | Various | Tax Foreclosure | 1,208 |
| Melvin Washington | Various | Government | 665 |
| Michael Kelly | Various | Tax Foreclosure | 534 |
| Dennis Elliott | Asset Managers Direct | REO | 391 |
| Matthew Tatarian | Various | Tax Foreclosure | 344 |
| Bert Dearing Jr. | Various | Tax Foreclosure | 304 |
| Stephen Hagerman | Brick Homes, Unique Homes, Other | REO | 207 |
| Leslie Coxon | Home Source Detroit | REO | 177 |
Kelly, according to Akers, is one of the more "sophisticated" speculators working in Detroit.
"He's not just engaged in a single practice like the one called out here in the complaint, but he also purchases vacant land near potential development sites, he finds wrinkles in land records. He's notorious for purchasing parcels within parcels in the land auction," Akers said, pointing to a
2011 Detroit News article that detailed this unusual practice where Kelly has been known to find anomalies in the tax auction — single parcels within a business's larger footprint — and then scooping them up with the intention of selling them back to the buisness at a premium. He notably did this in 2006 with a parcel within a strip club's parking lot. He bought the land for just over $1,000 and sold it back to the club for $19,000.
Today, Akers said Kelly owns roughly 500 properties in Detroit. At the peak of his two-decades of buying properties in the Wayne County Tax Auction, Kelly had more than 1,150 parcels, according to the complaint.
"He's one of the earliest and most recurring characters in the auction showing up in person for days with a team of people going back and forth looking over things and just acquiring lots of properties," said Akers.
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