The current COVID-19 pandemic has affected the housing market in more than a few ways. In addition to virtual showings and listing agents needing to find increasingly creative ways to motivate buyers to close a purchase in these economically uncertain times, funding opportunities are shifting towards a more flexible yet somewhat risky approach. Fortunately, there exist relatively safe, rational alternatives to mortgage home buying in Minnesota. One of them is acquiring a contract for deed.
Contracts entail the home seller financing the home purchase fully, as opposed to shifting this financial responsibility to a third-party lender, such as a credit union or a bank. This arrangement can be beneficial to both buyers and sellers, as it allows buyers who may otherwise have struggled to find financing to achieve homeownership. In this period of expected economic drought, it also allows sellers to secure sales in the influx of long-term income they may otherwise have missed out on due to the banks’ reluctance to lend amidst nationwide employment dips.
How A Contract For Deed Works
A contract for deed is also commonly referred to as a “bond for deed” or a “land contract.” Some sellers may also choose to refer to it as an “installment land contract,” which alludes more clearly to how the contract is paid in pre-set installments. These contracts entail transactions based on a buyer’s agreement to pay for the purchase price of a property with monthly installments. Sellers may or may not decide to add interest to these installments.
Generally, sellers will choose to waive interest payments as a gesture of both good faith and goodwill to facilitate the purchase for the buyer. In Minnesota, where almost 20% of people have lost their jobs and incomes due to the COVID-19 pandemic, this form of lawful agreement can allow many locals to safely make up for lost income with the swift sale of their property, and others to avoid homelessness after failing to pay their mortgages.
Often, a contract for deed will require the seller to be willing to waive or reduce down payments to make the purchase accessible for lower or middle-income level families. The buyer(s) will then take immediate possession of the property, but the legal rights to the property remain in the seller’s hands until the contract is fully fulfilled and the entire payment is complete. In states like Minnesota, contract for deed arrangement entitles the buyer to both immediate occupancy after the contract has been signed by all parties involved in the conveyance and to claim a homestead property tax exemption.
Advantages Of Contract For Deed Arrangements
Contract for deed agreements may increase in popularity in the next few months as it is a relatively faster and more affordable transaction than a traditional mortgage for both the buyer and the seller. There are no origination fees, formal applications do not need to be filed, and closing and settlement costs (entailed in the lengthy conveyancing process) are low.
There are added advantages for the buyer, as the final purchase price may come out significantly lower than it would have with a traditional mortgage, which entails substantial interest payments to the lending institution. Because there are no significant down payments to place, this option is also often more accessible to families having recently overcome financial strains and looking to engage in a new chapter of their lives with a home of their own.
In case the payments have defaulted, it is also easier for the homeowner to have the property seized by having the contract canceled. They can then resume possession of the home, and keep all the past payments as liquidated damages for a breach of contract. No judicial action or foreclosure sale is required for the buyer to regain possession of the home.
Weighing Risks Against Benefits
Because the use of a contract for deed involves two civilian parties dealing directly with each other, there is no other institution to take on some of the conveyancing risks. These may include defaulting payments as a buyer’s financial situation changes, or the need to re-negotiate payment arrangements to accommodate undisclosed reparation needs, etc. In such cases, it will be up to the seller to decide whether or not to invalidate the contract, which puts the buyer at greater risk of eviction and of losing all past payments.
Similarly, the seller will not receive any substantial payment before giving over the home keys to the buyer; therefore, they are at risk of receiving very little money before having to invalidate the sale and begin the buyer-hunting, negotiation, and closing process again.
Because both parties involved share some of the risk contract for deed arrangements entail, it is fair to assume that all individuals will gain from respecting their end of the bargain. Therefore, if you’re looking to sell a home in Minnesota fast or complete your home purchase without bank involvement or a sizable down payment, contracts for deed may be your best option.
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About Transition Realty
Transition Realty owner Steve Lehmeyer specializes in helping people manage real estate transactions in the Minneapolis/St. Paul area. His experience in the Minnesota real estate market spans 20 years. Steve and his team work with clients to buy & sell single-family homes, townhouses, condos, lake homes, and investment property. Download a free home search app for your smartphone or search the MLS at TransitionRealty.com.