Contract for deed home sales used to be mostly unregulated in Kansas. A new law changes that.

Editor’s note: This story is being re-publish ed with permission from KMUW through the Wichita Journalism Collaborative.

A new law regulating contract for deed home sales is now in effect in Kansas.

Contracts for deed allow a homebuyer to make monthly payments directly to a seller instead of to a bank, with the expectation that the home’s title will be transferred to the buyer once all installments are paid.

The mechanism, also known as a land contract, offers a low-barrier pathway to homeownership – especially for people with poor credit looking to avoid traditional lenders.

But state lawmakers, the Federal Trade Commission and even research organizations like Pew Charitable Trusts have found the contracts can be risky for buyers. Pew found 686 land contracts were recorded in Kansas from 2005 to 2022 – but researchers say that’s likely a vast underestimate because the contracts don’t have to be tracked.

The state Legislature voted almost unanimously to pass a bill in April that would add more regulations to contract for deed sales.

“Previous to this, there’s been no oversight over the sale of real estate through the use of contract for deeds,” said Rep. Jason Probst, a Hutchinson Democrat, who has worked on the bill for six years. “When I was working on this, I would tell people, ‘You know, we have more regulation and oversight over selling a $500 used car than we do on a piece of real estate.’

“This is a good way for people to get homes, but it’s also ripe for exploitation by bad actors. And so I’m really hopeful that this will curb that practice.”

The law went into effect July 1. It adds a variety of mechanisms to protect buyers:

• Allows buyers or sellers to record the contract for deed at the county register of deeds office
• Prohibits a seller from signing onto a contract for deed if they do not hold the property’s title. That means, with some exceptions, a seller cannot have a mortgage or lien on the home it’s selling with a contract for deed.
• Gives buyers a minimum of 30 days to catch up if they fall behind on payments, before having to vacate the property.

Pew Charitable Trusts, which recently conducted a study into the major risks contracts for deed pose for homebuyers, commended Kansas for the legislation. The policy allowing buyers or sellers to record contracts for deed with the county is especially important for transparency, said Tara Roche, the project director for Pew Charitable Trusts’ Housing Policy Initiative.

“Calling for the ability to record these is absolutely a step in the right direction,” Roche said. “And it will help us learn a bit more about the market so that legislators can figure out, ‘What’s happening?’”

Rep. Nick Hoheisel, a Wichita Republican, requested the bill for introduction in 2023. He said requiring contract for deed sellers to have a free and clear title is important. The rule prevents sellers with mortgages from collecting payments from buyers and failing to use the money to pay the bank.

In 2021, a family living near Hoheisel’s district found that the contract they signed – technically, a lease agreement with option to purchase – was fraudulent because the sellers didn’t own the property outright.

Hoheisel said the Legislature received input from industry groups, including Realtors, bankers and lawyers from the Kansas Bar Association.

“All these organizations, they all agreed we needed to do something – that this was a pretty unregulated market, and we needed to give certain protections,” Hoheisel said.

The legislation also added some protection for sellers. If a buyer defaults and the contract is recorded with the county’s register of deeds, the buyer must alert the county to release the document. If they don’t, the buyer could be required to pay the seller’s attorney fees.

“This was meant as essentially as a mechanism to … clear the title,” said Mark Tomb, the vice president of Governmental Affairs at the Kansas Association of Realtors. “And that will actually speed up a transaction.”

The post Contract for deed home sales used to be mostly unregulated in Kansas. A new law changes that. appeared first on KLC Journal - A Civic Issues Magazine from the Kansas Leadership Center