Land contract financing, a.k.a. the contract for deed, is a go-to method of home buying in Minnesota — especially in urban neighborhoods. These contracts allow homeowners to sell directly to buyers, bypassing the scrutiny of a mortgage lender. Each year, thousands of Minnesota buyers use them to finance their home purchases.
Federal lawmakers across the political spectrum say it’s high time for Congress to apply stricter oversight to Minnesota, and to all states.
But why? What’s going on? Would more regulation make sense? Let’s take a look.
Contracts for Deed: The Basics
A contract for deed is seller financing. The method typically involves a modest, affordable home, with one person selling to another. The buyer doesn’t use a commercial lender and doesn’t need to pay closing costs. Instead, the buyer pays the seller installments over time, following the terms of the contract the parties create.
Speaking of terms, the seller and buyer work out the down payment, monthly payments due, and a plan for the payment of insurance and taxes.
In contrast to a typical 30-year mortgage, a contract for deed might span five years — but the parties decide that for themselves. Usually, there’s a large final payment due at the end.
As with a mortgage, though, the buyer moves in right away. But the deed doesn’t transfer until the end of the term. (This poses a risk to the buyer, because the seller can tie up the title at any time by taking a loan out on the home.)
What if the buyer stops paying the seller? In that case, the seller simply won’t give up the deed, and the buyer will have to give up the home. This is known as forfeiture.
The now-sidelined buyer should get a refund for any improvements they made to the home. But what if the seller won’t hand over a fair reimbursement? Worse still, what about sellers who get into issuing land contracts as a habit — keeping down payments as well as the home? There are some sleazy sellers who set buyers up for failure, evict buyers, keep what the buyers invested, rinse and repeat. Sometimes, the buyers are people with religious views that prevent them from paying interest to a lender. There are schemers out there who don’t mind preying on such people as a matter of course.
Cutting Out the “Middleman”: Pros and Cons
Mortgage lenders aren’t exactly rubber-stamping applications these days. Seems they are skittish about borrowers’ buying power in a volatile economy. If a seller can help a buyer out, why not?
In fact, housing advocacy groups have long depended on contracts for deed to help boost buyers with modest incomes.
A contract for deed avoids closing costs and loan origination fees. It bypasses the time-consuming rigamarole of loan underwriting. There’s no need to pay private mortgage insurance to keep a lender happy.
OK, what about the drawbacks?
A number of things could go wrong in a contract for deed. We already mentioned one — the seller could tie up the title at any point until the contract concludes and the deed transfer occurs.
And how can the buyer know that the title is clear? A mortgage company would have performed a thorough title search. What if the seller owes past-due bills, for example? Companies or agencies can slap liens on the home that will follow the deed to the buyer.
The only way for a buyer to solve this particular problem is to request a title search. And optimally, the buyer should have a professional appraisal or home inspection done. Even if they personally don’t feel strongly about these matters, it’s a good idea to have documentation to offer future owners. And the inspection is a matter of basic safety.
Another pitfall is the risk of agreeing to unclear terms and conditions in the contract. The parties need to take care to spell out how they will handle home maintenance and improvements. And who pays the property taxes? And so on. As we’ll see, Minnesota already has a law that directs the parties to spell it all out in their contract.
For the seller, the biggest drawback is waiting five years (or whatever term is in the contract) to get fully paid. But the owner may want that monthly income boost over time. So, whether a land contract is or isn’t a good thing depends on the parties’ situations, together with their commitment to fair dealing.
Minnesota: One of the Major Land Contract States
Contracts for deed are nothing new in Minnesota. Counties have recorded more than 47,000 of them. That puts Minnesota among the top five states for land contract use. (The top states for contracts for deed are Michigan, with more than 110,000 on record, and Ohio, which has upwards of 60,000).
In Minnesota, as in about half the U.S. states, the government regulates these deals. For one thing, a contract for deed must be recorded.
What other state-specific requirements already exist?
- The seller may need to give the buyer a disclosure form at least five days before the parties sign the land contract.
- Contracts must be recorded (by the buyer, in Minnesota) in the county in which the home exists.
- Contracts must lay out who is responsible for key expenses.
- Minnesota sellers may back out after 60 days of nonpayment.
A mortgage borrower who struggles to pay would get more time and protections. Now, Minnesota’s lawmakers want to ensure more stringent protections for contracts for deed.
Minnesota and Nationwide: New Legislation on the Way?
So far, no national law controls the specifics of how people may use land contracts. The states are free to regulate these transactions — or ignore them. When you know that 8 million-plus U.S. homes have been sold under contracts for deed, the importance of this issue comes into clear focus.
Are some people making major financial mistakes without knowing it? No doubt. Are some people losing their entire investments to sellers who won’t transfer the deeds? Yep, that too.
So now, federal law and policy makers want to add to the protections for people involved in land contracts across the United States. The idea is to leave land contracts out there as an option, while keeping buyers from getting the rug pulled out from under them.
The Preserving Pathways to Homeownership Act would lower the boom, requiring all states to:
- Create a statewide recording requirement. Sellers would be required to record the contract within five days of execution. That would change the way they do things in Minnesota, where the buyers record the contracts.
- Impose state foreclosure requirements in case of buyer default. This would mean buyer-borrowers could keep their built-up equity, yet allow the sellers to recoup money they’re honestly owed.
It would offer some other basic consumer protections, too. As you can see, this proposed law would create a sea change in the contract for deed arena.
Supporting References
Alex Horowitz & Tara Roche for The Pew Charitable Trusts via PewTrusts.org: Fact Sheet – Despite Risks, Thousands of Minnesotans Buy Homes Using Contracts for Deed; A Review of the State’s Land Contract Financing Market (Mar. 15, 2024; citing 2024 research from ATTOM Data Solutions, ProPublica; lawmakers, and others).
Tina Smith, U.S. Senator for Minnesota, press release published at Smith.Senate.gov: U.S. Senators Tina Smith, Cynthia Lummis Introduce Bipartisan Legislation to Protect Prospective Homebuyers From Predatory Financing Agreements (Feb. 1, 2024).
Deeds.com: For Home Buyers and Sellers – How a Contract for Deed Works (Sep. 10, 2020).
Deeds.com: The Quitclaim Deed’s Function in a Contract for Deed Sale(Feb. 7, 2019).
Deeds.com: What Is a Contract for Deed? (Dec. 18, 2018).
Deeds.com: A Contract for Deed vs. Traditional Mortgage (Feb. 10, 2012).
And as linked.
More on topics: Contract for deed, Seller-financed home sale
Photo credits: John Emil Hernandez via Wikimedia Commons (CC-BY SA 3.0 unported); and Tony Webster via Wikimedia Commons (CC-BY SA 2.0 generic).