In Minnesota financing of the purchase of property is normally accomplished with a promissory note and mortgage that allows the selling or financing party to foreclose on the property if payment on the promissory note is not paid. An alternative method of financing is through a contract for deed.
What is a Contract for Deed?
In a contract for deed, unlike a mortgage, the owner or seller of the property finances the buyer’s purchase instead of a lending institution. The buyer takes possession of the property immediately and agrees to pay the purchase price of the property in monthly installments. The seller holds the legal title to the property until the last payment is made and the contract is fulfilled. Upon full payment, the seller conveys title of the property to the buyer by way of a deed. Should the buyer default, the seller can cancel the contract and take back the property.
Is an attorney required to prepare a Contract for Deed?
Individuals, title companies, and realtors that draft a contract for deed, use a template, or one-size-fits-all, version of a contract for deed. There are many pitfalls using a one-size-fits-all template.
As each property is unique, so is each transaction. A template cannot tailor a transaction to meet the parties' specific needs. More importantly, there are a number of laws that a contract for deed seller must comply with when selling the property.
When we work with our clients, whether a buyer or seller, we ensure the contract for deed includes language and terms that have been proven to provide legal protections to our clients. The legal terms we include are not available in a template. As neither realtors or title companies are allowed, or qualified, to provide legal advice, they are unable to include language similar to that that we put into our contract for deeds.
Contract for Deed Benefits
When should you use a Contract for Deed? What are the benefits?
A contract for deed can be used in place of a mortgage between private parties. As compared to a mortgage obtained through a lending institution, the terms of a contract for deed can be more freely negotiated between the buyer and seller. There are additional benefits to using a contract for deed for both the seller and buyer.
From a buyer’s prospective, a contract for deed can be used when a buyer may not qualify for a loan. A contract for deed is faster and less costly to finalize when compared to a mortgage from a lending institution.
Instead of paying a lender interest on a mortgage, the seller receives interest payments from the buyer. A An additional advantage for a seller is that a contract for deed typically takes between 60 to 90 days to cancel and get the property back upon default as opposed to a mortgage that takes approximately 9 to 15 months to foreclose. Also, when opting for a contract for deed it may not be necessary to involve a realtor and pay a realtor’s commission.
However, although there are many benefits to using a contract for deed, there are also drawbacks that should be considered. For example, if a buyer contracts for improvements to the property that remain unpaid, a mechanics’ lien can attach to the property. In such a case, the mechanics’ lien is superior to the interest of the seller. This means that in order to maintain the seller’s interest in the property and avoid a mechanics’ lien foreclosure, the seller would be responsible to pay the unpaid charges.
How long does it take to prepare a Contract for Deed?
The process of preparing a contract for deed for review and signatures can be completed in just days.
Do I need an attorney to do a Contract for Deed?
Although it is not necessary to retain an attorney, Minnesota law has many statutory and other legal requirements that must be complied with in a real estate transaction. In addition, it is good practice to have an attorney make sure your legal interests are protected.