Contract for Deed for Sellers – Part 1
Are you familiar with a Contract for Deed? It is also known as a “land contract”. This is a kind of agreement where the seller of a property provides financing to the buyer. The buyer will, then, have to pay the agreed price in installments.
The payments made to the seller commonly include principal and interest payments, similar to a typical mortgage. A balloon payment is commonly put in place at the end of the contract. This kind of agreement sounds advantageous to the buyer, but the following are the seller’s benefits for entering in to a contract of deed:
Contract for Deed PROs for Sellers
- This kind of arrangement is very attractive to buyers. Loan approvals are becoming harder to get everywhere. On top of that, if the seller offers terms and rates lenders don’t typically offer, buyers can make easier payments. This is why you’ll get a lot of offers when you open your property to a contract for deed.
- The seller doesn’t have to worry about missed payments. This is because the law allows the seller to easily cancel the contract. There is no need to have judicial action or do a foreclosure sale. The seller can simply recover the property within 60 days.
- Past payments are retained. Aside from recovering the property, the seller doesn’t have to return or refund the payments made by the buyer in the past upon cancellation of the contract.
- Steady monthly income will come in. This benefit applies to sellers who own their houses outright. In most cases, interests on payments made by the buyer are higher compared to other types of investment.
Of course, there are always the cons:
Contract for Deed CONs for Sellers:
- The seller doesn’t have to worry about missed payment, as mentioned. But, the process of evicting the buyers and cancelling the contract has to be followed. This should be in accordance to Minnesota law. For a full guide of the legal process of eviction in Minnesota, click here.
- Because a balloon payment is an over-sized payment, the buyer might not be capable of paying the entire some. Even though past payments were never missed, the seller would have to either:
- Evict the buyer. Again, refer to this link under the section “Steps in Termination of
Contracts for Deed”.
- Extend the contract
Although the seller will still receive payments with an extension, the balloon payment is still a big amount of money that could have been put to other uses like a down payment on a new house, for example.
- Lastly, most buyers assume that it is OK to go into this type of agreement with an existing mortgage. The thinking is that they can later pay off their mortgage when the buyer settles the balloon payment. There’s always that risk of the buyer not settling the balloon payment.
On top of all these, if the seller still has an existing mortgage, he or she should check the terms. This is because selling a house on a contract for deed will be a default for any outstanding mortgage. This will trigger the acceleration clause which makes the entire loan due and payable immediately.
The seller also needs to be the property manager. This means that the seller needs to track and collect payments, update property taxes and insurance, provide a statement of interest for income tax reasons, and double check the property to protect the seller’s investment.
These are some of the key things the seller has to think about before entering into a Contract for Deed. Do you need more real estate tips like this? Check out our blog for more tips.