Land Contract Fraud Alert: Detroit’s Biggest Landowner Michael G. Kelly Accused Of Land Contract Fraud
Most Detroiters have never heard of Michael G. Kelly. Yet, Kelly is one of Detroit’s biggest landowners. Kelly is now being accused of land contract fraud. Plaintiffs allege the contracts are fraudulent and predatory. However, the term predatory doesn’t always apply to land contracts as it does with mortgage lending. This lawsuit would change that.
Mantese Honigman and Michigan Legal Services filed the suit. The lawsuit seeks class-action status and alleges that Kelly and four other defendants lured vulnerable Detroiters into a “real estate bait and switch.”
The lawsuit alleges Kelly and others violated the Truth in Lending Act and the Home Ownership Equity Protection Act. However, land contracts operate outside government regulations. The lawsuit argues that Kelly’s land contracts violate the spirit of TILA and HOEPA. Additionally, Michigan courts have upheld that land contracts and lease options are equitable mortgages.
Land Contract Fraud 101: Land Contracts Vs. Mortgages Vs. Lease-Options
Land contracts differ from mortgages in several different ways. First and most importantly, the title of the property doesn’t transfer from the seller to the buyer until the final payment on the land contract is paid. In other words, land contracts are purchase agreements with a payment plan.
There are also no appraisals or inspections required. The creditworthiness of the buyer is at the sole discretion of the seller.
Michigan law prohibits landlords from collecting a security deposit greater than 1.5 times the monthly rent. However, the seller of a land contract can ask for a “nonrefundable down payment” at a cost far greater to the purchaser.
Also, any liens like tax liens or mortgage liens have priority on the title of the property to the land contract. The buyer could find themselves losing the property if the seller doesn’t inform them of any mortgages.
Land Contract repossessions are also handled differently than foreclosure.
A Lease Option is just like any other rental agreement. The only difference is there is an option for the tenant to purchase the property at the end of the lease period. The landlord and tenant can negotiate if any portion of the rental payments goes toward the final purchase price.
Kelly’s Alleged Land Contract Fraud Scheme
The complaint filed in U.S. District Court for the Eastern District of Michigan shows how Kelly’s scheme worked:
- Kelly or one of his companies would purchase the dilapidated homes at the Wayne County Tax auction for a low price. Kelly or one of his companies would lure in a potential buyer and have them sign an “ambiguous, opaque contract” with a high-interest rate.
- The contract would give the purchaser the impression that after several years of payments they would own the property. The purchaser would also be responsible for fixing up the property.
- The purchaser would inevitably fall behind on payments because of repair costs and the high payments. As a result, Kelly would then evict the purchaser as a tenant instead as a land contract vendee. Thus, bypassing the 90-day redemption period allowed under Michigan law.
- The tenant’s eviction would go unquestioned because of the contract’s intentional use of ambiguous, confusing, cherry-picked language. Kelly and his companies would have purchasers typically sign two documents when committing to the property. One being a Lease with Option and Real Estate Purchase Agreement. One makes the customer a tenant and the other makes them a purchaser. This creates confusion.
- Once the first purchaser was evicted, the scheme would begin again with a new potential buyer.
- The deals were predicated on buyers never actually getting the property.
The lawsuit also alleges:
The complaint states the contracts acted as “high-cost mortgages.”