Contract for Deed

Sometimes the term rent to own is confused for a contract for deed purchase.  A contract for deed is very different than renting to own.  If you think about it, both terms describe themselves.  Rent to own is renting while you try to figure out how to own.  A contract for deed is a contract that sets up terms by which you can receive the deed for the land.  Sounds pretty simple really, but when you're not experienced simple things can become complex because of simple mistakes.

A contract for deed starts out with a purchase agreement, just like a regular house purchase.  The difference is a regular house purchase is usually financed with a mortgage through a bank or mortgage company.  A contract for deed financing is between the seller and the buyer.  The contract for deed defines the terms by which the buyer can receive the deed to the land.  The terms include:

• the purchase price
• the downpayment amount
• the loan amount
• the interest rate
• the term of the loan
• what the monthly payment will be
• whether there is a ballon payment

It also clarifies:

• whether there is an existing mortgage
• who pays the property taxes
• how much change can be made to the land during the contract period
• whether the seller can place a lien against the property
• the amount of improvements that the buyer can make to the property without the sellers' written permission

Additional things are covered in the contract for deed as well, but many of the items above could be a blog entry on their own.

Contracts for deed are often used in rural areas of Minnesota or by private investors who wish to sell without incurring a large lump sum of capital gains taxes.  Rural areas often used contracts for deed because raw land is often not considered sufficient collateral for a traditional mortgage.  There is the added value of community pressure if someone defaults on their payments or if the seller does something shady.  The neighbors hear about such defaults and there is community pressure to be honest and/or to perform.  Often contracts for deed have a higher interest rate than traditional mortgages as well.  The risk to the seller is higher, therefore, the interest rate goes up.  To protect buyers from greedy sellers, the State of Minnesota has a legal cap on the interest rate.

Additional quirks about contracts for deed will be addressed in future posts.

(c) Bonnie Erickson 2006

Comments

[steve vennemann]

Thank you great information....

[RonOrr.com]

I enjoyed this article, it's interesting what you said about the rural part, I never looked at it that way before and with the land and collateral.