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What is a Contract for Deed?

On Behalf of | May 8, 2015 | Firm News |

One of the more common real estate transactions that comes through our office is the sale of land by a contract for deed.  Everyone is familiar with buying real estate and paying for it by a mortgage loan.  While mortgage loans have become the prevailing way to pay for real estate, the contract for deed is perhaps best viewed as the older brother of the mortgage loan.

Contracts for deed (also known as “land installment contracts” or “installment sale agreements”) were popular following the westward expansion of the United States as banking and the free-flow of capital was still developing.  The contract for deed allowed the buyer of real estate to make payments of interest and principle on the purchase of the land directly to the seller of the land.  When the contract was paid in full, the contract required the seller to transfer the title to the property to the buyer.

Contracts for deed still exist today.  In Minnesota, contracts for deed can be used to buy and sell any real estate.  That includes residential homes, agricultural land and commercial property.  There are advantages and disadvantages to buyers and sellers to using a contract for deed.  Some of these include:

  • Seller advantages: contract for deed can spread tax consequences of selling property out over multiple tax years, rather than having all tax consequences in a single tax year; allows private sellers to keep an interest in the property during the contract period (this is called the “vendor’s” interest); in the event of a failure to pay, the process of recovering ownership of the property by the seller can be much faster and easier than the mortgage foreclosure process.
  • Buyer advantages: often no bank or financial underwriting; good way to finance a property purchase with sub-par credit; opportunity to build equity before obtaining traditional mortgage financing.
  • Seller disadvantages: can delay full payment; rather than receiving all of the purchase price up front, seller receives payment over period of years; if buyer fails to pay real estate taxes, seller still has to pay; if buyer doesn’t pay, seller incurs attorney’s fees to cancel the contract and recover the property.
  • Buyer disadvantages: less forgiving on failure to pay; can lose property interest much faster than with mortgage financing; fewer consumer protection laws; often interest rate is higher than bank financing.

While contracts for deed have a long history, they are still valuable today.  Many of our clients find great benefits (both for buyers and sellers) in the contract for deed.  If you are looking at buying a property, and are wondering whether a contract for deed may make sense for you, give us a call at 952-314-4189.