What to Know About Buying a House as a Person of Color

·8 min read

When asked if she has ever felt racial discrimination in real estate, Michelle C., who is Black, shares a nail-biting retelling of how she and her mother lost their Brooklyn brownstone worth more than 2.2 million dollars.

Michelle and her mom bought the building through HUD foreclosure for $135,000 in 2001. Michelle was 21 at the time. It turned out, however, that the holdover tenant who came with the building was involved in criminal activities forging property ownership documents. He was eventually arrested and went to jail-but not before he caused $700,000 worth of damage to the property, says Michelle.

After six years in court, Michelle and her mother were forced to sell their property for around $975,000, despite two proven identity theft claims and a judge's forged signature on a fake title. After $300,000 in court fees and $475,000 in mortgage interest, Michelle and her mom walked away penniless and devastated. Their life savings, her father's financial legacy, and their dreams of building generational wealth through real estate investing were dashed.

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Today, many people assume homeownership is color-blind, so they doubt stories like Michelle's are truly about race. The Fair Housing Act was established in 1968 to level the playing field, but Black real estate investors and agents alike know that racism persists. Redlining, racial steering, and even vacant property ordinances have disproportionately robbed Black and Brown homeowners of valuable properties that could have established intergenerational wealth. And in fast-gentrifying neighborhoods, Black owners find themselves fighting to hold onto their high-priced homes or to sell at competitive prices.

Here's what you need to know about buying (or selling) a house as a person of color, including how to protect yourself, how to face the structural problems that continue to harm Black homeowners, and how to be part of a systemic solution.

Undervalued Appraisals

"BIPOC certainly continue to face barriers to real estate investing," says Venroy July, a Baltimore-area residential real estate developer. Appraisal bias, which leads Black people's homes to sell for much less than their white neighbors', has been covered recently by major publications, such as The Washington Post and Bloomberg, yet few people realize how much that implicit bias snowballs into an avalanche of barriers for Black homeowners.

"Access to capital remains a problem," July continues. "Without the generational wealth built up in equity, BIPOC investors often require alternate sources of financing because traditional avenues and networks aren't available." What's more, those alternative sources of financing often serve to diminish investor returns-meaning Black folks are less likely to make money off their homeownership.

"These issues are further compounded by appraisal risk, which we are seeing as banks move to automation," July adds. "I recently had a bank do a 'desktop appraisal,' where a computer program or person at the bank basically looks at other properties in the neighborhood without actually coming to look at the renovations. The desktop appraisal came in at $170,000. After protest, an appraiser actually came to the house and it appraised at $244,000." If a Black owner had gone with the first appraisal and sold, they would have been out $80,000.

Limited Financing

I spoke with other agents who all vouched for Venroy's calculations but requested anonymity due to fear of their honesty impacting their ability to earn.

"It has been ages since I've experienced discrimination based solely on the protected classes in the Fair Housing Act," one agent based in the U.S. southwest said. "What I have experienced is 'lack of care' with persons who don't have excess discretionary funds."

What does this mean, exactly? "Many people have student loans and other debts that prohibit them from obtaining conventional financing," he explains. "For example, it's a veteran's right to exercise their VA loan benefit, if they're eligible. So, how many of our veterans are BIPOC? How many BIPOC only qualify for Federal Housing Association (FHA) financing-and are not only paying more money for financing but also not being selected by sellers because of stigma?"

The implication is that a seller who knows these lending details is less likely to accept a purchase contract from someone who doesn't list a conventional loan. The problem is that many BIPOC buyers can't access those loans in the first place-or those loans have much higher interest rates for BIPOC borrowers. Collectively, these lending biases disproportionately bar purchasers of color.

Bias Against Black Rehabbers

The burden only mounts for flippers, who say their finishes need to be of disproportionately high quality compared to white homeowners rehabbing houses to sell. One Maryland agent said that in her experience, when buyers find out that the investor behind the deal is Black, they become extremely harsh about the quality of the finishes. They demand more aggressive repairs and there becomes a higher burden to justify the home's asking price.

"That's why many [Black rehabbers] use white buffer agents who become the face of the deal," she admits, noting a Black developer colleague who, even though he has the experience to do it himself, has hired a prestigious white firm to close his sales. "Once, he set up a showing with a foreign buyer from Asia, but when they saw him at the door, the buyers refused to get out of the car," she says. "Ever since, he doesn't do deals himself."

He purposefully disassociates himself from the deal, because he's seen that, as a Black man, even his presence on site for a showing leads to people making cheaper offers for the home. Although hiring a white middleman represents a sizable expense that cuts into profits, it's worth it in the long run for how much he can save on low-ball offers-and he's accepted it as the cost of doing business while Black.

How to Apply Anti-racism to Real Estate

So how do we-investors and homeowners of all backgrounds-fix what's broken, so that we can all win in the real estate game? There are a few pie-in-the-sky options that only policy can fix, but there are also practical steps that buyers and sellers can take right now to make a difference.

Policy Changes

A change that would benefit BIPOC buyers and sellers? Striking "loan type" from homeownership contracts-if the financing type doesn't add more costs for the seller-in order to squash discrimination based on the type of alternative financing. This would, of course, require a regulatory or legislative change.

Venroy also recommends "additional incentives and tax benefits be provided to permit BIPOC investors to invest in underserved neighborhoods. Policies should be adjusted to make it easier for everyone to raise capital, potentially through crowdfunding."

Organizers, consumers, and city councils can suggest this structural remedy by writing to the Federal Housing Administration (FHA), as well as sharing cost-benefit analyses with city planning boards and fair housing commissions. So pick up a pen or email your city, county, and state leaders to explain how equity in lending could lead to equality for all.

Buyers: Be Cautious

Aspiring POC homeowners and investors should never assume that a loan offer is in their favor. Be persistent in scrutinizing all the assumptions and numbers around a deal, because they impact returns.

Are you not even thinking of this home as a vehicle for wealth, but simply the place your kids will call home? Think again: Both are true. Homes can stay within a family for many generations, and they can be leveraged for long-term wealth for generations to come. Remember that how you negotiate this purchase could impact your loved ones more than you ever imagined.

Sellers: Don't Ignore Bias

It is common for appraisers to undervalue homes based on the race of the residents-but it's also illegal. If you're selling, be proactive by providing comparator data-and consider getting more than one appraisal if you're handed a low-ball offer. If you have done recent rehabs or home repairs, keep those receipts so that appraisers and future buyers have a benchmark. Report unfair practices when you see them, and beware of your own implicit biases in selecting who will win your home. And perhaps most importantly: Don't judge a buyer by their loan type.

Pragmatic Alternatives

Fewer upfront costs, better loans, and less risk could prevent a harrowing landlord tale like Michelle's. Fear of stories like hers keep far too many Black and brown people from buying residential property, but you can help put a stop to the discrimination-plus, there are other ways to invest in real estate, too.

For now, Real Estate Investment Trusts (REITs) and commercial crowdsourcing sites such as Crowdstreet and Realty Mogul are considered the safest place for a novice to dabble in the market before investing a life's savings into a forever home, a rental property, or a rehab. These alternatives to owning a single-family home are shaking up the status quo-as collective buying power proves to be one real and significant method of inserting owner equality across the real estate market on a national scale.