real estate

Contract For Deed: The Pros and Cons

1000 500 Sam Radbil

In some states, especially Minnesota, contract for deed is a popular alternative to a traditional mortgage. What is contract for deed? It is a type of seller financing where monthly payments are made to the seller over a prescribed time period. Unlike a traditional mortgage, however, the property deed remains with the seller, and while the buyer occupies the property, the buyer will not actually own the premises until all payments have been made.

Why Do a Contract for Deed in Minnesota?

Contract for deed is often used when the buyer cannot qualify for a traditional bank mortgage. This problem can occur for many reasons including:

  • Bad credit.
  • Non-provable income.
  • Business ownership.
  • Divorce.
  • Prior bankruptcy.
  • Tax liens.
  • Court cases.
  • Tight lending standards.
  • Appraisal issues.
  • Previous foreclosure.
  • High student loan debt.
  • Job loss.
  • Illness.
  • No credit history.

Minnesota home buyers with any of the above issues may find that contract for deed financing is a nice solution.

The Advantages to Contract for Deed

The advantages of contract for deed in Minnesota include:

  • No bank scrutiny.
  • More flexible terms.
  • Personalized interaction with the property owner.
  • Bad credit is not necessarily a problem.
  • Quicker turnaround time.
  • Appraisals may not be necessary.
  • Property improvements can be made.
  • There are ownership tax benefits for the buyer.
  • MN contract for deed is a great way to build credit.
  • No pre-payment penalties.

The Disadvantages

Some disadvantages of a contact for deed in MN could be:

  • More rapid foreclosure parameters.
  • Unethical sellers could offer a contract for deed on an encumbered property.
  • Higher interest rates.
  • Title stays with the seller until paid in full.

Is Contract for Deed for You?

Redfin says that nationwide housing sales are still strong:

Redfin Housing Market

Mortgage lending requirements have somewhat loosened, more buyers can now qualify, and rates are low:

Fixed Mortgage Rates

Still, if you have injured credit, you may not be able to qualify for a traditional loan, and, if you are renting, your monthly payment goes directly to your landlord with no benefit for you. This is where a contract for deed arrangement can really be an excellent benefit.

Look at this comment from the Minnesota Home Ownership Center:

“The use of contracts for deed to buy a home is on the rise. The foreclosure crisis has resulted in tighter loan underwriting standards, leading to fewer qualified buyers. At the same time, an increase in bank foreclosures means more homes are for sale at reduced prices. Investors often purchase these homes for cash and then offer them for sale using a contract for deed. Since contract for deed agreements take place without the underwriting criteria set by conventional lenders such as FHA, they are attractive to buyers that are not able to meet these restrictive requirements. Contract for deed agreements are attractive to home sellers because they open up the market to more buyers who, for a number of reasons, cannot find a mortgage-ready buyer to purchase the property.”

And while banks like to pigeonhole prospective buyers like this (image below), you will find a lot more flexibility with a Minnesota contract for deed transaction.

A Lot to Consider

We’ve shown that contract for deed financing can be a good alternative to traditional mortgages especially if you have credit issues. Of course, due diligence is very important, and you want to make sure that your seller legitimately desires to make the contact work for both of you. The Atlanta Legal Aid Society advises, “The key to making these agreements work is to go into them with your eyes open to all the possibilities, to make payments on time, and to work on repairing your credit to the point where you’ll qualify for more traditional financing.”

C4D

A company like C4D is a great place to start; their unique approach allows you to bring your dream home to them, they actually purchase it, and then they sell it to you. And if you want us to help you find a home, that works, too. We have a team of realtors ready to get the search started for you. These transactions are legal, regulated and fair, and even your real estate broker’s commissions are protected.

If you’ve found your home, congratulations! If you have it financed, that’s great, but if you are turned down by the bank, don’t give up—contact C4D.

Minnesota Home Owner

Contract For Deed: Homebuyer’s Guide

1024 683 Sam Radbil

The Minnesota contract for deed process has been outlined succinctly below by the Greater Minnesota Housing Fund:

A contract for deed is an alternative financing agreement in which the seller finances the sale of the property rather than a lender. As with traditional forms of financing, the buyer takes possession of the home after the closing of the sale. When buying a home through a contract for deed, the home-buyer agrees to pay the seller the purchase price over time with interest in monthly installments.

Minnesota Contract For Deed For Homeowners

Who Typically Utilizes the Minnesota Contract for Deed Option?

Minnesota Realtors report that a substantial number of consumers that have been turned down for conventional mortgages consider contract for deed financing. Many hard-working individuals face credit issues at times, and contract for deed homes in Minnesota can be a great way to overcome mortgage financing problems like:

  • Bankruptcy
  • New job
  • Divorce
  • Non-provable income
  • 1099 income
  • Small business income
  • Gig economy income
  • Barter income

Minnesota Contract For Deed: How It Actually Works

The contract for deed process is an installment sale. With a reasonable and sometimes smaller down payment, a home-buyer can purchase a home without the intense credit scrutiny normally experienced with traditional mortgage financing. The owner of the home is the seller, and that owner finances the sale. The buyer immediately takes possession of the property, but the deed remains with the seller until all payments have been made.

What Can Derail Conventional Mortgages?

Since the Great Recession of 2009, requirements to obtain conventional mortgage loans have been seriously tightened as anyone that has applied for a loan can readily attest. Any Minnesota Realtor can recite horror stories of good people with decent credit that were arbitrarily turned down at the bank. One even mentioned a client that had $1,000,000 in cash in the bank, had recently retired, had great credit, but was denied a loan because of a poor income to loan ratio! If millionaires can have problems obtaining financing, imagine the problems regular working home-buyers could face.

Minnesota Contract for Deed Advantages to Homebuyers

A great article by Alex Everest lists the following advantages to a contract for deed deal:

  • You can now buy your home – an unfriendly bank will not be a problem.
  • It’s easier to qualify – contract for deed sellers understand credit issues.
  • No lender fees – those “junk” closing costs simply do not exist in contract for deed transactions.
  • Quick closing – you can move as fast as you and the seller desire.
  • Tax benefits – you are treated like the owner by taxing authorities.
  • You can improve the property – you don’t need a landlord’s permission to remodel.
  • You have a chance to rebuild credit – you can have your lender report your payments to the credit bureaus.
  • You have the right to pre-pay – there are usually no pre-payment penalties.
  • You will gain from property appreciation – you can build equity.

Possible Issues

  • You don’t get title to the property until you have paid for it – you don’t “own” the home until you have paid for it in full.
  • If you become delinquent, the foreclosure process can be quick – this process could take only 60 days.
  • Your seller does not perform his/her obligations to his/her bank – the property may have an existing mortgage, and the seller, instead of using your payment to make his/hers, defaults on that mortgage.
  • The property is encumbered – if you don’t do a title search you may be subject to mechanic’s liens, etc.
    Your transaction has breached the seller’s “due on sale” mortgage clause.

We Are Different and We Can Help

We’re not going to lie to anyone that is looking for a Minnesota contract for deed, as we have seen significant instances of fraud and abuse. Sometimes an individual seller designs a contract with high monthly payments that is destined to fail . Unwary buyers can be saddled with a fixer-upper that has many more problems than anticipated. We have even witnessed predatory sellers that look for vulnerable and uneducated buyers in order to extract a few high payments; they eventually foreclose and then repeat the process. That is not what we do here, however.

Our Process

Normally, if you are interested in a contract for deed, a Minnesota Realtor will show you the homes listed with contract for deed financing as an option. What we do is different. If you find your dream home but cannot get conventional financing, C4D buys if for you. Then we own the home, we gain clear title to it, and we sell it to you. You get to pick the exact home you want.

Yes, of course we finance our purchase, but we accomplish that with our bank, and our bank requires no due on sale clause. They know exactly what we are doing, and in fact they protect you—the buyer–as a proper title search is completed. We are an established business and we make money by having deals succeed and culminate in your free and clear home ownership. We facilitate this process and do everything we can to ensure that the financing structure will work for you as well as for us. You are not dealing with an unknown sketchy owner you found on a home loans for bad credit site.

Apply Conventionally First

We encourage you to apply for conventional financing before you come to us. If that doesn’t work, however, inform your Minnesota Realtor that you are taking the deal to C4D. Of course you will have to fill out an application, and have a down payment—though in certain circumstances we can even help with that. Remember to assure your Realtor that we protect their commissions.

We’ll quickly analyze your situation; our goal is to work out a deal that benefits both parties and puts you on the path to home ownership. The Motley Fool gave us this great chart that shows what happens when you pay off your home instead of paying rent:

Home Price vs. DebtImage source: strawhomes.com

Here’s another one from Edelman Financial:

Home Ownership Equity

Start Now

If you’re renting, have had credit issues, and don’t want to wait for that ethereal day when the bank finally might say yes, contact C4D today. We will do everything we can to make home ownership a reality and not just your dream.

Minnesota Contract For Deed: 2018 Realtor Guide

1024 451 Sam Radbil

As a Minnesota Realtor, you have probably seen some bizarre and arbitrary loan rejections, but that doesn’t make you or your client feel any better. Approaching a lender for bad credit loans may not help since their rates can be predatory. What you do need to do is find a lender that will facilitate a contract for deed deal.

For example, you’re confident that you have a reasonably qualified client, and you’ve found them the perfect home. Your client is excited, has a down-payment, you write the offer, it’s accepted, and you’re off to the bank. The bad news comes quickly, however, as the lender claims that your buyer doesn’t qualify for financing. According to GoBanking Rates, buyer financing can be denied for not only a weak debt to income ratio but also for any of the following reasons:

  • A recent job change.
  • Credit report errors.
  • A property appraisal that comes in less than the purchase price.
  • Old liens and judgments.
  • Recently opened or closed credit card accounts.
  • Early retirement.
  • Excessive business debt.
  • 1099 income/inability to prove written off expenses.
  • Questionable tax returns.
  • Inability to substantiate where the down payment came from.

Legitimate Financing with Contract for Deed

The Minneapolis Federal Reserve Bank wrote a great article explaining the methods, risks and benefits of a contract for deed to finance Minnesota real estate. They simply state:

In a contract for deed, the purchase of property is financed by the seller rather than a third-party lender such as a commercial bank or credit union. The arrangement can benefit buyers and sellers by extending credit to homebuyers who would not otherwise qualify for a loan. Indeed, public and nonprofit housing advocacy organizations have used the contract for deed as a tool to help low- and moderate-income households attain homeownership.

This U.S. census bureau chart shows a solid percentage of contract for deed homes and Hispanics are major subscribers to this type of bad credit loan solution.

Owner-Occupied Homes with Contracts for Deed in The U.S.

Minority Homebuyers Using Contract For DeedSource: American Housing Surveys 2001, 2003, 2005, U.S. Census Bureau.

Minorities Want To Buy Homes

Furthermore, this recent report from ABODO shows Realtors in Minnesota exactly where minority homebuyers are active, and Minnesota is right in the middle at 40 – 49 percent.

ABODO Report on Minority Homebuyers

The Mechanics of Contract for Deed Minnesota Financing

For individual contract for deed sales to work properly, the seller must realize that they will not get the full purchase price immediately. Instead they are offering an installment plan sale to their prospective buyer. While the buyer will gain immediate occupancy, the seller still holds the deed will remain the owner of the property until all payments are made. This is a great path to home loans with bad credit for the buyer, but the seller, again must be in a position to take installment payments rather than receiving a lump sum payment.

Free and Clear … and Legal?

Contract for deed Minnesota home financings are simpler if the seller owns the property free and clear of all liens and mortgages.  This way, the seller must wait until all installment payments have been made, but since there are no third parties—like banks—to deal with, all of the money goes to the seller; they merely have to wait longer to get the total amount due them.

While a seller with a bank mortgage on a property could sell that property on a contract for deed basis, this could be a problem for a buyer since the seller’s original mortgage may prohibit this type of transfer, and that could put the buyer at risk, if the bank discovers the sale.

In many states, especially Texas, this kind of solution to a loan with bad credit is done frequently. When the buyer asks about the due on sale clause in the seller’s original mortgage, the usual reply is “the bank will never find out, and if they do, they won’t care. Banks would never foreclose on a property if someone is making the payments.” Yes, this may be the case in some situations, but you as a Minnesota Realtor know that it is not prudent to believe that someone “would never” do something.

How You Can Get This Done

Luckily, there are companies like C4D. C4D specializes in Minnesota contract for deed deals. Unlike some individual sellers, however, C4D does not put the buyer at risk with original mortgage due on sale clauses because their banks do not require them. C4D has spent years developing solid banking relationships, and this drives successful and mutually beneficial financing arrangements.

How Contract for Deed Actually Works

Certainly, Minnesota real estate professionals should try first for conventional bank financing. If this fails, however, take the deal to C4D. C4D will analyze the situation, and quickly let you know if they can help. Minnesota Realtors understand that while C4D cannot automatically take any deal, they do have the approval leeway that many banks just do not possess.

C4D looks at every deal individually and independently. This is not cookie-cutter lending because C4D understands that all situations are different. Some loans may require different down payment percentages, and in certain circumstances, C4D can even help secure down payment dollars.

If a deal is approved, C4D physically buys the property from the seller and offers a contract for deed to the buyer. As in classic contract for deed financing, the seller owns the property, but the seller is now C4D.

Contract For Deed Is Simple

Since the 2009 meltdown, mortgage approval can be tricky. You can have a great buyer but the banks just say no. If this happens to you, bring your deal to C4D—a local Minnesota company—and see what they can accomplish. By the way, your Minnesota Realtor commission is totally unaffected by this process, and you will receive the full amount upon contract execution.

What are the Next Steps?

If you have any questions about Contract for Deed financing, you can always contact us here.