{"id":3905,"date":"2024-04-19T06:54:57","date_gmt":"2024-04-19T10:54:57","guid":{"rendered":"https:\/\/www.deeds.com\/articles\/?p=3905"},"modified":"2024-06-16T10:24:09","modified_gmt":"2024-06-16T14:24:09","slug":"risky-business-minnesota-home-buyers-skip-the-mortgage-preferring-contracts-for-deed","status":"publish","type":"post","link":"https:\/\/www.deeds.com\/articles\/risky-business-minnesota-home-buyers-skip-the-mortgage-preferring-contracts-for-deed\/","title":{"rendered":"Risky Business? Minnesota Home Buyers Skip the Mortgage, Preferring Contracts for Deed"},"content":{"rendered":"\n
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Land contract financing<\/em>, a.k.a. the contract for deed<\/em>, is a go-to method of home buying in Minnesota<\/a> \u2014 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.<\/p>\n\n\n\n

Federal lawmakers across the political spectrum say<\/a> it\u2019s high time for Congress to apply stricter oversight to Minnesota, and to all states.<\/p>\n\n\n\n

But why? What\u2019s going on? Would more regulation make sense? Let\u2019s take a look.<\/p>\n\n\n\n\n\n\n\n

Contracts for Deed: The Basics<\/h2>\n\n\n\n

A contract for deed is seller financing<\/em>. The method typically involves a modest, affordable home, with one person selling to another. The buyer doesn\u2019t use a commercial lender and doesn\u2019t need to pay closing costs. Instead, the buyer pays the seller installments <\/em>over time, following the terms of the contract the parties create.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

In contrast to a typical 30-year mortgage, a contract for deed might span five years \u2014 but the parties decide that for themselves.  Usually, there\u2019s a large final payment due at the end.<\/p>\n\n\n\n

As with a mortgage, though, the buyer moves in right away. But the deed doesn\u2019t 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.)<\/p>\n\n\n\n

What if the buyer stops paying the seller? In that case, the seller simply won\u2019t give up the deed, and the buyer will have to give up the home. This is known as forfeiture<\/em>.<\/p>\n\n\n\n

The now-sidelined buyer should get a refund for any improvements they made to the home. But what if the seller won\u2019t hand over a fair reimbursement? Worse still, what about sellers who get into issuing land contracts as a habit \u2014 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\u2019t mind preying on such people as a matter of course.<\/p>\n\n\n\n

Cutting Out the \u201cMiddleman\u201d: Pros and Cons<\/h2>\n\n\n\n

Mortgage lenders aren\u2019t exactly rubber-stamping applications these days. Seems they are skittish about borrowers\u2019 buying power in a volatile economy. If a seller can help a buyer out, why not?<\/p>\n\n\n\n

In fact, housing advocacy groups have long depended on contracts for deed to help boost buyers with modest incomes.<\/p>\n\n\n\n

A contract for deed avoids closing costs and loan origination fees. It bypasses the time-consuming rigamarole of loan underwriting. There\u2019s no need to pay private mortgage insurance<\/a> to keep a lender happy.<\/p>\n\n\n\n

OK, what about the drawbacks?<\/p>\n\n\n\n

A number of things could go wrong in a contract for deed. We already mentioned one \u2014 the seller could tie up the title at any point until the contract concludes and the deed transfer occurs.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

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\u2019t feel strongly about these matters, it\u2019s a good idea to have documentation to offer future owners. And the inspection is a matter of basic safety.<\/p>\n\n\n\n

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\u2019ll see, Minnesota already has a law that directs the parties to spell it all out in their contract.<\/p>\n\n\n\n

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\u2019t a good thing depends on the parties\u2019 situations, together with their commitment to fair dealing.<\/p>\n\n\n\n

Minnesota: One of the Major Land Contract States<\/h2>\n\n\n\n
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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).<\/p>\n\n\n\n

In Minnesota, as in about half the U.S. states, the government regulates<\/a> these deals. For one thing, a contract for deed must be recorded.<\/p>\n\n\n\n

What other state-specific requirements already exist?<\/p>\n\n\n\n