Contract for deed purchases are an option for Twin Cities home sellers because they open up the market to more buyers who are not attracting a lender qualified buyer to purchase the property.
Uninformed Minneapolis home buyers don't understand the risks they are taking on with a contract for deed purchase. "As credit continues to be tight, unregulated contracts for deed are fueling housing fraud in areas like north Minneapolis, where foreclosed homes come cheap," announced Legal Aid attorney Luke Grundman November 2, on Minnesota Public Radio.
New Minnesota Law Impacting Contract For Deed Transactions
A new Minnesota law was put in force August 1st that requires additional notification be provided to potential home buyers in Minnesota contract for deed transactions. In a contract for deed, the property seller, rather than a lending institution, finances the buyer’s purchase of the home. The buyer takes immediate possession of the property and agrees to pay the purchase price directly to the seller in monthly installments. The seller retains the full title to the property through out the duration of the agreement up until the last payment is made and the contract is completely satisfies.
Drawbacks And Risks Of Contracts For Deed
The Minnesota law, put in force May 2013, says home sellers will be required to provide notice to buyers that suggests obtaining an appraisal and inspection prior to signing a contract for deed. Going a step further, the seller must state potential drawbacks of the purchase arrangement. Failure to provide this notice could result in a penalty of up to $7,500 for the seller. The Minnesota legislators behind the new legislation were motivated in part by a Star Tribune report someone marketing that documented potential abuses of the contract for deed situation. Many of the more than 1,000 contract for deed sales examined found weaknesses that could potentially make default likely for many buyers, including:
high interest rates
large balloon payments
Too often, contract for deed purchases were completed without an adequate home inspection causing home buyers to be surprised by finding themselves responsible for correcting major code violations or safety hazards that a typical inspection would have diagnosed.
Contract For Deed Home Sales Are Faster and Less Expensive
Our Minneapolis Federal Reserve addresses pros and cons of the contract for deed option. A benefit for both Twin Cities home sellers and buyers is that contract for deed home sales are much faster and less expensive to process than traditional home mortgages. Since they have no origination fees or high closing costs, some buyers find them attractive. Additionally the home mortgage approval process is shorter, making contracts for deed quite appealing to buyers facing time constraints or may have failed to qualify for a mortgage. The U.S. Census Bureau contracts for deed are a more popular financing alternative among minority homebuyers. According to figures from the 2005 American Housing Survey, 9.5 percent of Hispanic owner-occupied households and 7.1 percent of black owner-occupied households use contract for deed, versus a mere 5 percent of all owner-occupied households.
Drawbacks And Risks Of Contracts For Deed
Home Destination advises potential home buyers to be fully informed of the drawbacks of contracts for deed and the risks they carry. If you are an unexperienced buyer or first-time home buyer, be sure to gain expert advise. Despite taking on home repair and maintenance responsibilities (as would a traditional mortgagor), buyers have limited ownership rights and control over their properties during the duration of making payments to the home sellers. One major risk stems from the short time period required to cancel the contract in the event of default. According to the UST report, "A defaulting contract for deed buyer in Minnesota has only 60 days from receiving notice to address the default and pay fees to reinstate the contract or find new housing." That is considerably less tan the cushion of 6 months allowed on traditional home sales and mortgagors facing foreclosure.
Minnesota Justice Foundation Unregulated Contracts For Deed Research
The market's response more contract for deeds is an increase in unlicensed rentals and predatory seller financing devices.
The Minnesota Justice Foundation has led a research on the topic of flipping homes and what impact it is having as Minn ea pool is legislators grow more concerned that it may be decreasing property values. "The foreclosure crisis resulted in a dramatic shift of properties from owner-occupied to investor-owned, particularly in low-income communities of color. Meanwhile, the city of Minneapolis, for example, charges as much as $2,500 to convert owner-occupied residence to a rental property. The market's response includes an increase in unlicensed rentals and predatory seller financing devices, such as contracts for deed," is posted on the Minnesota Justice Foundation website.
Determining The Numbers Of Contract In Deed Agreements
Encumbered by the lack of financial and legal sophistication.
However, it is difficult to know exactly how prevalent contracts for deed are, because the nature of these arrangements allows the buyer and seller a degree of anonymity. Despite laws in some states that 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 sales often go unrecorded due to a lack of financial and legal sophistication on the part of both parties involved in the agreement.
Buying Without Understanding A Contract For Deed
The problem is that many buyers don't understand what they're getting into.
On top of the notorious high number of equity-stripping scams that accompany a contract for deed, The Federal Reserve Bank of Minneapolis says, "They have a reputation for offering little legal protection to buyers. Despite gaining home repair and maintenance responsibilities, buyers have limited ownership rights and control over their properties while they make payments to sellers. Buyers gain no rights of redemption through the transaction".
"As credit continues to be tight, unregulated contracts for deed are fueling housing fraud in areas like north Minneapolis, where foreclosed homes come cheap. Having properties flip this fast isn't necessarily good for the community either, if this is another wave of lending that leads to vacant households and frequent property changes," ~ Minneapolis Legal Aid Attorney Luke Grundman.
Contract For Deed - The Perfect Solution?
Contract for deed financing may seem like the perfect solution to overcome the tough market conditions brought on by the foreclosure crisis.
At first blush a contract for deed financing may seem like the perfect solution for a buyer to get around tight lending conditions brought on by the foreclosure crisis. A contract for deed home purchase offers a financing tool for private sellers who are anxious to sell their homes and for homebuyers who are unable to purchase with a mortgage loan. However, buyers and sellers should exercise caution when considering a contract for deed agreement. Regardless of how the contract is structured, there can be great risks for both buyers and sellers. Additionally, buyers should be aware that a contract for deed lacks many of the protections given to borrowers purchasing a home with a conventional mortgage.
Buyers Need Protection
Minneapolis housing advocates and real estate professionals are active.
To prevent more people from entering into contracts they don't understand, Minneapolis officials are surveying local neighborhoods to determine a more accurate count of how many contracts for deed currently exist in Minneapolis. Paralleling the efforts for better informed homebuyer decisions, housing advocates are crafting legislation for next session they say would give more protection to contract for deed buyers.
Some Sellers Pocket Buyer Payments Unawares
If the seller defaults, the buyer may lose the home and all payments.
The buyer needs to know for certain that the seller is the true owner of the house by checking with the county recorder's office to see the name(s) 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 contact the seller's mortgage company - directly and in person - prior to signing the contract to determine whether the seller is current on his or her payments. Some "scam" sellers will retain a buyer's payments and not apply them to the mortgage, and it may take some time to figure that out if you are not on-top of it. If the seller defaults on the mortgage in this scenario and the home is foreclosed, the buyer will lose the house and all the paid installments. Don't take unnecessary risks. Let Home Destination help you find your best solutions.
Definitions of a Contract For Deed:
The City of St Paul describes a contract for deed as an alternative financing arrangement in which the seller finances the sale of the property rather than a bank or other third-party lender.
A contract for deed, also known as a "bond for deed," "land contract," or "installment land contract," is a transaction in which the seller finances the sale of his or her own property. Definition from The Federal Reserve Bank of Minneapolis
According to U.S. Legal, "A Contract for Deed is often used as an alternative means of financing the purchase price of property. The buyer does not receive an actual deed until payments are made under the terms of the Contract for Deed agreement." It allows the Seller and Purchaser to elect specific requirements concerning purchase price, interest, and payment terms.
What A Contract For Deed Means For The Buyer
Compiled by The Minnesota Homeownership Program, Greater Minnesota Housing Fund, Family Housing Fund, Minnesota Foreclosure Department Council and The Minnesota Association of Realtors
Advantages To The Buyer
You will quickly note that there are more disadvantages to navigate than there are advantages. Minneapolis legislators are concerned that miss the reasoning that this alternative financing mechanism lacks many of the protections afforded borrowers who have traditional mortgages.
Low down payment. Some sellers require only a minimal or no down payment.
Homesteading. Purchasing a home by contract for deed gives the buyer the right to homestead and take advantage of certain Property tax benefits such as the market value exclusion and being eligible to apply for the property tax refund.
Mortgage interest deduction. As the legal owner, the buyer can claim mortgage interest deductions and real estate tax on their personal income taxes. Since contracts for deed typically do not require the seller to provide a year-end statement of interest paid, buyers should keep careful records of their payments.
Less stringent financing standards. Since it is the seller’s decision, they typically have less stringent underwriting standards than a mortgage loan.
Lower transaction costs. There are no origination fees, points, formal loan applications or high closing costs with a contract for deed. Even if closed by a title company, which is recommended, the costs are much lower than for a mortgage.
Path to home ownership. Structured properly with terms that the buyer can afford, a contract for deed may be a viable path to home ownership for those with credit challenges.
Potential to improve credit score. Making timely payments on the contract can be a way to improve the buyer’s credit score. However, this will happen ONLY if the seller reports buyer payments to a credit bureau, which most private sellers do not.
Disadvantages To The Buyer
Lacks the protection offered under Minnesota foreclosure laws. If the buyer fails to make a payment or is in default on other conditions of the contract, the seller can cancel the contract and reclaim the property without a foreclosure sale or judicial action.
Financing with a balloon payment. If the buyer is unable to get a loan at the time the balloon payment is due, the seller has the right to cancel the contract with a 60-day notice, take possession of the property and keep any down payment or other payments to date and any equity that may have accrued.
Seller retains title to the property. This means the seller can continue to burden the property through mortgages and liens. The best way to protect your self is to record the contract with the county recorder immediately after the contract is executed.
Lack of consumer protections. This financing option does not provide the same protections available with standard financing products, leaving open the possibility that unscrupulous sellers will structure the contract with unfavorable terms. It leaves a vulnerability that the buyer may unawares face unfeasible or even predatory financial terms. Unlike most traditional home sales and mortgages, the majority of contracts for deed are not fully amortized and are frequently structured to require monthly payments for a few years, typically followed by a huge balloon payment upon completion.
A sale or transfer may bring a new investor with less flexibility. The seller has the unrestricted right to sell his or her interest in the contract. The buyer is typically prohibited from selling their interest in the contract without the seller’s consent.
Ineligibility for most first-time homebuyer programs since contract for deed is a form of ownership.
Repair and maintenance issues. The contract may state that the buyer is responsible for property repair and maintenance. However, this is negotiable.
Property taxes and Insurance. Unless otherwise stipulated in the contract, the buyer is responsible for paying property taxes and for obtaining adequate insurance
Wise Use Of Contract For Deed By Housing Funders
It can work great to help individuals and neighborhood - when you know what you are doing!
While the contract for deed may entail a litany of problems in the private market, this alternative financing device has proven to be a promising tool for the public and nonprofit sectors. Some housing funders and developers are using contracts for deed as a means of promoting homeownership for low- to moderate-income households. In particular, Minnesota Housing's Minnesota Urban and Rural Homesteading Program (MURL) has utilized contracts for deed as an effective tool to assist hundreds of Minnesotans in achieving sustainable homeownership while stabilizing declining neighborhoods.
Minneapolis Contract For Deed $1 House Flip Asking $145K
An insightful comment was left on the story of the Minneapolis home purchased for $1 and after three months it is on the market for $145,000. Home Destination encourages buying properties for investment purposes, but it is good to know your figures. The commentator calculates, "$44,999 of profit for three months of 76 hour weeks isn’t much unless it was one or two people doing the work. Because now you have to pay the Realtor 5%, any property taxes incurred during the sales process, etc. Let’s say it’s a three man crew that takes home $36K post sale. Sorry, but $12K for three months of double time isn’t all that great, and you tied up $100K for 3+ months".
Minnesota Department of Commerce Forms
Homeowners can go to The Minnesota Department of Commerce website and find Minnesota forms for Contracts for Deed, Contracts for Deed Addenda, Assignments of Contracts for Deed, the Cancellation of Contract for Deed and more. Or go to http://www.mncourts.gov/selfhelp/?page=325.
Resources For Homeowners
Home Destination offers a wealth of resources on buying distressed properties, how to buy a home with better mortgage disclosures, and foreclosure purchasing care.
If the home you are considering is either a foreclosure or short sale, our handy reference on Foreclosure And Short Sale Terminology will be a great help. And whether you are seeking to go the traditional route for home financing or use a contract for deed, start by knowing what purchase range you are best suited for by using a mortgage calculator and mortgage worksheet.
Home Destination, a Minneapolis residential Realtor guides Twin Cities homebuyers and sellers as they consider a contract for deed and best housing options. Call 612-396-7832.
Download the City of St Paul Guide For Homeowners Considering Contract For Deed purchase, posted January, 29, 2012
Jenna Thuening, a CDPE can help you weigh your buying options, while considering both the advantages and disadvantage of a contract for deed.
Eden Prairie MN 55344
Jenna's home page: homedestination.com
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NOTE: The information provided in this webpage is based on government documents, which are subject to change. Therefore, the Distressed Property Institute, LLC, and the agent featured on this page, cannot be held responsible for the accuracy of the information provided here. This survey can help you determine the likelihood of your eligibility, but only the servicer of your loan can tell you if you qualify. The above brokerage assumes no responsibility nor guarantees the accuracy of this information and is not engaged in the practice of law nor gives legal advice. It is strongly recommended that you seek appropriate professional counsel regarding your rights as a homeowner. The above brokerage is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan.