In a contract for deed, the purchase of property is financed by the seller rather than a third-party lender such as a commercial bank or credit union. The arrangement can benefit buyers and sellers by extending credit to homebuyers who would not otherwise qualify for a loan. Indeed, public and nonprofit housing advocacy organizations have used the contract for deed as a tool to help low- and moderate-income households attain homeownership.
Facts and features
A contract for deed, also known as a “Owner financing,” “land contract,” or “installment land contract,”Seller financing” is a transaction in which the seller finances the sale of his or her own property. In a contract for deed sale, the buyer agrees to pay the purchase price of the property in monthly installments. The buyer immediately takes possession of the property, often paying 10 to 20% down of the sale price of the property, while the seller retains the legal title to the property until the contract is fulfilled.
The buyer has the right of occupancy. In Minnesota, the right to claim a homestead property tax exemption. The buyer finances the purchase with assistance from the seller, who retains a security in the property.
The contract for deed is a much faster and less costly transaction to execute than a traditional, purchase-money mortgage. In a typical contract for deed, there are no origination fees, formal applications, or high closing and settlement costs. Another important feature of a contract for deed is that seizure of the property in the event of a default is generally faster and less expensive than seizure in the case of a traditional mortgage. If the buyer defaults on payments in a typical contract for deed, the seller may cancel the contract, resume possession of the
property, and keep previous installments paid by the buyer as liquidated damages. Under these circumstances, the seller can reclaim the property without a foreclosure sale or judicial action. Usually in Minnesota the contract can be cancelled after 60 days of non payment. Please seek legal advice on this.
Because the buyer in a contract for deed does not have the same safeguards as those afforded a mortgagor in a purchase-money mortgage, the contract for deed may appear to be essentially a rent-to-own arrangement. However, in a typical contract for deed, the buyer becomes responsible for the obligations of a mortgagor in possession, such as maintaining the property and paying property taxes and casualty insurance. Unless prohibited by the contract, either party may sell his or her interest in the contract. The buyer may keep any equity above what the buyer owes to the seller and sell his or her interest in the property.
Positives of a contract for deed
Homebuyers like contract for deed purchases for several reasons. This method may be especially appealing to homebuyers who do not qualify for a mortgage, such as people who work cash jobs and are therefore unable to prove their ability to make payments.
Buyers who have filed for Bankruptcy protection.
Second homes-investment properties vacation homes.
Lack of time at current employment. Most lenders will want 2 years at a job or if self employed.
Since the contract for deed process is significantly shorter than the mortgage-approval process, it may attract buyers who face time constraints or have limited options, such as people who are losing their homes to foreclosure. First-time homebuyers who lack experience in the market or individuals who are wary of traditional financial organizations may also choose a contract for deed because of the relative simplicity of the buying process.
Relocation from another state.
Minnesota law states that they require the buyers or sellers in all contracts for deed to record the sale in the office of the county recorder or registrar of titles within a specified time period.
The seller must set forth the terms of the contract in a purchase agreement. It is important that both parties fully understand the provisions of the contract, because once the purchase agreement has been signed, the options available to both the seller and buyer are limited.
- The buyer should know whether he or she is responsible for property tax payments and insurance and whether the contract for deed includes a balloon payment. If it does include one, the buyer should be certain that he or she would be eligible for a mortgage to cover the payment when it comes due.
- The buyer should also make sure that the seller is the true owner of the house by checking with the county recorder’s office to see who is listed as the registered owner. If the seller still has a mortgage encumbering the property or is responsible for paying the taxes or insurance,
- The buyer should ask the seller for a Truth in Sale of Housing report to determine the condition of the house. This report is required in Minneapolis and St. Paul and some other cities. In cities where it is not required, the Buyer should find his or her own inspector to assess the condition of the home.
The buyer should record the contract immediately with the county recorder’s office or the registrar of titles. Recording the contract will help prove the buyer’s possession of the property and protect him or her from post-contract encumbrances placed on the property by the seller. We always recommend using a title company or law office for the closing they will record the deed for the buyer and seller.
To purchase real estate in Minnesota or Wisconsin the buyers and sellers should use BoardWalk Premier Realty.
No Mortgage Registration Tax (MRT) is due on the recording of a contract for deed because a contract for deed is exempted under the MRT law. View the law, Minnesota Statutes, Chapter 287.04 subdivision(d).
Deed following Contract for Deed
Deed Tax is due on the conveyance of legal ownership of real property with a deed following the satisfactory completion of the terms of a contract for deed. The deed that conveys legal ownership of the property from the grantor to the grantee is taxable. The basis of the Deed Tax is the total consideration for the conveyance. In most cases, the total consideration is equal to the principal amount of the purchase price agreed upon at the time of the sale.
Note: The basis of the Deed Tax does not include the interest charged and paid as part of the installment payments under the contract agreement.
Completion of Contract for Deed
(A) Steve sells real property to Joe for $ 200,000 on a contract for deed.
Terms: $ 20,000 down payment
$ 180,000 (6% interest amortized over 30 years $ 1079.19 plus taxes and insurance monthly for 60 months)
When the contract is “paid in full” and Paul provides a warranty deed to Joe. Deed Tax is due on the $ 200,000 purchase price.
Cancellation of contract for deed
No Deed Tax is due on the cancellation of a contract for deed. It is included as an exception to the tax under M.S. 287.22, Clause (1). The result of the cancellation is that the grantor retains legal ownership of the property.
Assignment of grantor’s (vendor’s) interest with warranty or quit claim deed
Under a contract for deed, the grantor retains the legal title to the real property until the purchase price is paid in full and the other terms of the contract are completed.
Before a contract is paid off, the grantor (vendor) may choose to assign its contract rights to a third party.
Assignment of a grantor’s right to receive the payments is exempt from Deed Tax because no real property is conveyed. However, if the grantor issues a deed to the property along with the assignment, the conveyance document is subject to tax. Tax is based on the price paid for the assignment less the current contract for deed principal balance.
Under a contract for deed, the grantee (vendee) generally has the legal right to possess and use the property during the course of the contract and to receive legal title to the property when the terms of the contract are completed.
The assignment of a grantee’s interest in a contract for deed is exempt from the deed tax if the only thing conveyed is the right to make the payments and occupy the property during the term of the contract. However, if the grantee issues a deed to the property along with the assignment, the conveyance document is subject to the Deed Tax. Tax is based on the price paid for the assignment less the current contract for deed principal balance.
What types of properties can I buy on a contract for deed?
Virtually every type of property available can be purchased on a contract for deed. Feel free to browse our inventory of contract for deed properties. We have 100s to view daily on our sites. Contact us about our contract for deed financing.