How does default of the contract work with Rent to Own vs. Contract for Deed: When you don’t make your payments with a rental or a rent to own, typically the landlord can start an eviction process, which will later put a U/D (unlawful detainer) on the renters record. This can make it difficult to get past a credit check on the next rental property. A landlord typically can get a renter out within 3 weeks with a proper eviction properly served and put through the legal system. Whereby a contract for deed takes much longer to get the buyer out of the property. A contract for deed in Minnesota typically needs to be defaulted on with payments missed for 60+ days before the seller officially serves notice to start the cancellation. You can read about the cancellation process here.
Should you use an attorney to draft your Contract for Deed: You could use an attorney to draft up the paperwork for your contract for deed with the buyer and the seller. Their are standard real estate agent forms to do a contract for deed, they are done all of the time, and contract for deeds will be much more popular in the future. I am fine with the idea of using standard forms for the contract for deed. What I like about the concept of using an attorney is they could really come up with a lot of scenarios of future disagreements between both parties, and that way it can be in writing ahead of time. It’s really in both parties best interest to spell everything out in writing. The attorney’s can give the worst-case scenarios and the cost to each if any of the events were to happen. Attorney’s have a lot of experience in court, so they can help you prevent future disagreements and possible costly court cases. You can also close the contract for deed at a title company or attorney’s office which leads me to the next section.
Should you close your contract for deed at a title company: I would close your contract for deed at a title company and the reason is that most of the costs associated with the closing you are suppose to pay for anyways. The title companies $150 fee or $200 fee that they charge for closing your side of the transaction is pretty minimal. For example there will be pro-rated taxes, there will be research of any levied or past due assessments. There may be name searches for each party to look for liens and judgments which is necessary. There will be an interest pro-ration based on the day it’s closed. There will be a CRV -Certificate of real estate value form. After all of this info is looked up at the county and public records, which the title company will do, you know you will have a much cleaner transaction. It’s also good to at least consider buying title insurance, or at the very least have an O&E done, which is very inexpensive and it tells all owners and encumburances on the property, (meaning clouds on title, liens, etc.) As a buyer this would be important to you to know who else has interests in the property you are investing time and money into. Remember also that their will probably be about a $46 recording fee with the county when recording this contract, which is standard flat fee, as far as who pays that fee, I would guess a title company would list it on the HUD-1 settlement statement as a buyer fee, but I suppose just like with basically all closing costs, it’s negotiable ahead of time. Whether you pay the title company or not, it needs to be paid to the county of the property. Also the title company has experience with drafting up the final HUD-1 settlement statement. They can handle the closing for both the buyer and the seller. Because their are no lenders or loans involved in these closings, this closing is a piece of cake, it may even only take 5-10 minutes.
Should you record your contract for deed: You should really record your contract for deed, which the title company will likely do for you in the correct department and county. The reason is the state mandates that you record the contract for deed within the 4 months or their are penalties. Your goal as a buyer is to quickly get your name on the title on the county records, so that you can quickly homestead the property for tax reasons, and get the benefit of any other tax write-offs. In addition, and what I consider to be one of the most important reasons of them all is you are trying to start the title seasoning as quickly as possible. What I mean by title seasoning is that you as the buyer show on the record as the owner. The sooner you can get to 12 months, the better. Back a few years ago you could refinance a contract for deed probably a day after you bought it, these days due to tougher lending guidelines, much of the time you are looking at a minimum time of 12 months on title. The lender likes to see that a current person has owned the property for at least 12 months and isn’t flipping the property every month or two, lenders don’t like that as you’ve probably heard. Also after that 12 month period you are now going to use the appraised value of the property when you go to get refinancing. For example let’s say your property is worth $200,000 today. Now let’s say you owe $180,000 on the property because you put $10,000 down and you had $10,000 in equity at the time you purchased and/or from the past year of appreciation. Now you have a property balance of $180,000/divided by $200,000 which is 90% LTV (Loan to Value). We all know getting a new loan in this financial market is tough, but getting refinancing done is usually easier than a new purchase, and many more programs and options are available to you the buyer from competing lenders. One of the most important reasons to record the contract for deed is a seller could actually sell the property on a contract for deed to a few people all the same week, even though they shouldn’t, and could suffer the consequences and if one buyer held the paperwork for months and another recorded it, the one that recorded it first likely will show up as the new owner in the public records, based on the time stamp and recording date and time. It’s in the buyer’s best interest almost always to record the contract for deed, so get it recorded, and I would think the title company will take care of this for you.
How does the Financing work with a Contract for Deed: When you first buy a contract for deed, no lender financing is needed at all. The seller is actually keeping the financing in their name like it already is. It may be wise that the seller at least notify his/her lender that he/she will be doing a contract for deed transaction. The seller would decide what kind of interest rate they will sell to the buyer at, which will determine the monthly payments once you add on hazard insurance and property taxes. In addition the buyer will need a down payment at the time of the closing. The seller will also decide if the loan will amortize like a standard loan does, or if it will be just an interest only loan meaning that no principle payoff or reduction of the balance carried over from month to month. The more money you put down, the more say as the buyer you typically have in these kind of transactions. The real bank financing comes in to play at the end of the balloon term which is typically 2-3 years, but can be up to 5-7 years in some cases. As far as qualifying credit, I would suggest you have at least in the 500’s for a credit score, and put together a game plan on hiring a service to help you increase that score to 600-620+ credit score over the next 1-2 years, and work hard at doing this as a buyer. In the future it will be very important to your future refinancing if you have had any recent foreclosures, short sales, or bankruptcies on your credit report, as this can certainly extend the necessary time needed for the balloon and full loan payoff to get financing on this contract for deed, so that you can cash out the seller later.
What is a Balloon in regards to a Contract for Deed: A balloon payment simply means the final payment that’s due to pay off the entire loan for the seller. For example you buy a house on a contract for deed today for $200,000. You put 10% down ($20,000). You now owe $180,000 to the seller. If the seller takes your payments every month for 3 years, and your terms state a 3 year balloon, and you are paying interest only payments, then let’s figure out your balloon payment from there. If after 3 years you are current on all property taxes, assessments and other fees, the remaining $180,000 would be the one last lump sum balloon payment needed to pay off the seller’s existing loan which in turn gets you clear title and the deed to the property. By paying this final lump sum off, the main difference you will see if that you will officially own the property with all rights now. More importantly now that you own the deed to the property, you can now officially sell the property yourself whereas before as a contract for deed buyer/owner you really only could rent out the property, or sell on a contract for deed, but now as the deed owner you can fully sell the house as the new owner of the property holding the deed.
A seller who no longer wants to hold a contract for deed: Many times a seller will sell to you, the buyer, on a contract for deed, but after they sell to you, they no longer want to have the financing in their name. They want to be done with the property. Let’s say that the balloon term is for 3-5 years and the seller just doesn’t want to wait that long until they get their money out. In most cases the buyer’s credit isn’t good enough yet and they want 2-3 more years to get financing in place. The seller can assign or sell off that contract for deed paperwork just like banks do with mortgages, it’s very similar to that. The new owner of the paperwork would honor the contract for deed terms with the buyer previously in effect, but it would simply just be a new owner you the buyer, make your payments to. For the seller to sell this contract for deed after the closing with the buyer, 1 day later, 1 month later, or 2 years later, they have to make all of the paperwork and transaction look as solid as possible and to be a good asset for the next lender to buy from them. What makes this a good asset to them is a large down payment from the buyer, the better the credit score, the more advantageous to the seller. In addition, the longer the payment history on the contract for deed by the buyer helps a great deal when the seller goes to sell the contract for deed. The interest rate, term and the balloon term of the contract for deed also play a big role in what the seller will eventually sell the contract for deed for. Keep in mind as the buyer you still own the property and you get to buy the property at that price as the contract states, simply what’s changed is where you send the money to, so it’s very similar to what you see out in the lending world. The reason I explain this to you as the buyer is that you’ll find a seller much more willing to sell a house to you on a contract for deed, if you make the transaction as strong of an asset as possible and help the seller out, so that he/she can sell it in the future.
Interest Write-Off: You will want to check with your accountant on tax breaks for home owners, but a contract for deed has you as an owner on the property, so much like a house you can get write-offs for interest that’s paid on your house. Some of these tax breaks can change guidelines from year to year and differ from a homestead status to where you live in the property vs. investment properties that are rentals that you own on a contract for deed.
Depreciation with Taxes: Another feature you will want to ask your accountant about is depreciation. Typically the way depreciation works on a property is that you take the sales price of the property, let’s say $200,000 for an example, and on residential real estate we would divide that over 27.5 years. That’s $200,000 divided by 27.5= $7272.72 per year on average of a tax write-off against your taxes. Again check with your account I believe you can only do this with investment properties and not your current homestead, but please check into this. Also after many years you will have $7272.72 + $7272.72, etc added up as write-offs over many years. When you eventually sell the property, please keep in mind you will need to pay a recapture fee on that depreciated amount, and this will come back as taxes, so just be prepared and plan for that.
Potential Pitfalls of Contract for Deeds to Avoid: Their are easily many things to avoid and try to prevent when buying or selling on a contract for deed. Enough time spent going over scenarios and working with an attorney on the final paperwork can prevent a lot of these potential future problems. Working with an licensed agent to see the property and use standard forms will also prevent a lot of future problems. As a buyer you just really need to know that your payments being made to the seller are also being made to the lender from the seller. It’s been known to happen where the seller doesn’t make the payments to the bank and 6-12 months later the buyer of a contract for deed is being kicked out of their house because the seller was in a bad position. The buyer should close at a title company just so they have paperwork to show down payments and all taxes, and interest are being credited. The contract for deed should be recorded, it’s in the buyer’s best interest. Based on Minnesota law, technically the seller could sell the house on a contract for deed to a few different people, and most likely the one that records first is the one that will show as the owner, it’s called the race to the courthouse. I think the seller needs to be aware and the buyer of the cost in money and time to get the buyer out of the house if they default on the payments. The buyer needs to be aware that they have a deadline or balloon term to secure financing for the property, and if they put down a large down payment they need to take that deadline serious and really work hard on improving their credit. Buyer’s shouldn’t take on a monthly payment for more than they can afford, only to find themselves defaulting later. The buyer needs to keep current on the property taxes, after so many years if property taxes aren’t paid the county can take back the property. The buyer shouldn’t give the seller any reason to cancel the contract for deed, the buyer should live in the house, take care of it, improve their credit and seek financing as soon as they are able to. I personally think the larger the down payment the buyer puts down the more serious they will be about getting financing later on. The buyer needs to be very upfront about any recent bankruptcies, foreclosures or short sales on their credit report because this will play a vital role in how long of a balloon term they realistically need. I think that the buyer should get in contact with a credit repair agency within the first month of buying the contract for deed, as it takes time to develop the habits and pay things current and pay things off to get that credit score improved. You shoudln’t wait until the last minute, 2 months before the balloon term is up, it’s not enough time to improve the credit. Throwing money at the problem doesn’t always solve it, sometimes you need time to heal your credit score. Keep in touch with your credit score through the 3 credit bureaus online. I’ve done this and it works great, and if you pull your own credit score from these 3 bureaus it shouldn’t hurt your score from what I’m told. Always be prepared in the future that home prices go down, or qualification standards change and you need more money to be saved up as you may need to refinance at 80% LTV instead of 90% LTV in the future. Just plan for everything and work on it a little every day with saving more money, and improving credit and taking care of the house and keeping some extra money for taxes, insurance and monthly house repairs. As the buyer you will need to put aside some money to fix water heaters, walls, doors, carpet, and appliances that break. Go get Center Point Energy appliance program, which is very cheap monthly, and it should save you in the long run on many of your appliances that break down. Save the HUD-1 Settlement statement and or get a receipt for the down payment you have made.
How you can contact me if you want a contract for deed property: If you want to buy a property on a contract for deed, please contact me at 763-546-9090. Also I’d prefer you email me at ron@minnesotainvestors.com After reading this article I hope you realize that something as little as $5000 in hand is just going to make it too difficult to get a contract for deed property and get all agents and seller’s paid, so if you have less than $7500 for now, please go to rentals.com and search for some rental properties on that website, or you’ll have to search for the seller direct yourself without an agents help to make the most of your $5000 or less. When you email me, I also should know upfront your situation in regards to your best guess on recent credit score, and also any recent bankruptcies or foreclosures on your credit, as that will make a difference on the terms of the contract for deed needed. Obviously the more flexible you are the the location and property size and type , the easier it will be to get you a property. You can search on www.minnesotainvestors.com and search possible MLS properties to find houses available on a contract for deed. We can’t promise those are available on a contract for deed on the MLS, but with 15-20% down they are far more likely to be available on a contract for deed, but with less than 10% down, those listed MLS properties are likely not going to work out due to the lack of enough money, please keep this in mind. If you have $7500-$10,000 you have to be somewhat flexible, their aren’t endless properties available. Please go to Minnesota Contract for Deed Contract4Deed.com to see our recent inventory of properties and fill out the information form so we can start to help you. If you contact us and we contact you back, please make sure you return the communication either by email or phone promptly as we need you to keep in touch so we can move forward every day.
Where can you get the money needed for down payments? We have come up with a lot of companies that will lend money, try these two links: FAST 24 HOUR EZ MONEY also try unsecured business lines of credit
Thanks,
Ron Orr, Jr.
MinnesotaInvestors.com, Inc.
763-546-9090
ron@minnesotainvestors.com
