Des Moines could require owners to make repairs before selling homes on contract

MacKenzie Elmer
The Des Moines Register

Editor’s note: An earlier version of this story incorrectly identified the number of new contract sales inspectors the city plans to hire.

Des Moines city leaders on Monday will consider new rules that would force property owners to fix code violations before selling a house on contract.

The change is needed to crack down on homes in disrepair, the city says. But it is expected to face push back from the contract sales industry.

Christopher Schubert, the owner of Contract Exchange Corporation, agrees that Des Moines needs to clean up vacant and blighted properties, but he said contract sales aren’t the problem.

“Personally, I don’t think the city can code-enforce their way out of this problem," Schubert said.

Des Moines will consider new rules that would force property owners to fix code violations before selling a house on contract.

About 19 percent of the 1,814 homes sold on contract in Des Moines between 2011 and 2015 were in poor condition, according to a 2016 property analysis commissioned by the city. 

“I think it’s important to recognize that there are some out there that are doing it right,” said Phil Delafield, the city’s community development director. “But the problem is this 20 percent is causing the degradation of our neighborhoods because they keep spiraling down, and it’s dragging down property values next door.”

But homes sold on contract make up only 6 percent of properties in poor condition in Des Moines, according to the report. Rental units make up almost 20 percent. 

“It’s kind of the nature of the beast,” said Schubert, whose company oversees more than 500 contract sales in the Des Moines metro. “We’re competing with rental guys for properties, and they’re beating us out because they truly get to keep the property forever. ... Once its sold on contract, it’s gone, unless the contract fails.”

A real estate contract sale is a private agreement between a property owner and a buyer. The contract typically establishes a sale price, down payment, interest rate, and the number and size of payments.

Contract sales draw buyers who cannot qualify for a conventional bank loans, but they can be risky. Sellers can repossess a home if payments aren't made or the terms of the contract are not met.

Des Moines' neighborhood inspection division says approximately 1,814 homes in the city were sold on contract between 2011 and 2015. Twenty percent were in poor condition.

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SuAnn Donovan, a deputy zoning enforcement officer for the city, studied contract sales records and found properties in Des Moines that were forfeited back to the seller as many as five times.

“If a buyer misses a payment, they could lose all their money and the house,” she said.

Forfeited contracts is why Pam Carmichael, director of HOME Inc., supports the city's new rules for contract sales. The organization was established in 1967 to assist low-income buyers find quality, affordable housing.

“Not all contract sales are bad, but it is an area where people simply are not aware of their rights,” Carmichael said.

She said HOME Inc. regularly sees houses sold on contract because they can't pass a housing code inspection. The nonprofit gets about 100 calls per year from contract buyers who can’t pay for emergency repairs, she said. 

"They think (the defects) are something that the owner will take care of, and they’re surprised when they don’t,” she said.   

Des Moines' contract sales ordinance, passed in 2002, requires that homeowners have an inspection and provide a copy to the buyer two weeks before a contract is signed. But there is no requirement for the seller to complete any repairs.

The rules being considered Monday would require a home to meet the city's rental code standards before being sold on contract. A city inspector would check the structure, roof, plumbing, heating and cooling, electrical, insulation, ventilation, interior and fireplace.

The seller would get 30 days to bring the home into compliance, or pay a fee and enter into a renovation agreement with the buyer for more time to make repairs. 

The city has budgeted approximately $200,000 to hire two contract sales inspectors to handle the additional work created by the new rules. 

The new rules also would provide a legal path for the city to sue sellers for unaddressed code violations.

“I know there’s a huge outcry from contract sellers against this … but if they’re selling good units, I don’t see what the problem is,” Carmichael said.

The Des Moines City Council meets at 4:30 p.m. Monday at the Municipal Service Center, 1551 E. Martin Luther King Jr. Parkway.