A contract for deed is a contract between a seller and a buyer for the purchase of real estate where the seller finances the transaction. It usually takes the form of a buyer making installment payments to a seller to purchase property. After the buyer has completed making payments on the property, the seller gives the buyer a deed transferring title to the property.
Contract for deeds are usually referred to as “seller financing” because the seller agrees to take installment payments for the purchase of the property, rather than requiring the buyer to obtain a mortgage to purchase the property. Parties to a sale typically use a contract for deed in lieu of a buyer getting a mortgage when the property does not qualify for a mortgage, or the buyer cannot obtain a mortgage to purchase the property.
In Minnesota, the contract for deed form is a standard “fill in the blank” form which is universally recognized by the real estate industry. Parties usually hire an attorney to prepare a contract for deed because it is important to include all of the terms in the contract to protect the party requesting the contract for deed. A contract for deed will include the purchase price, monthly payment amounts, term of the payments, interest rates and other financial terms. It may be necessary to include terms dealing with the assignment of the contract for deed, and other terms dealing with the condition of the property.
It is not uncommon for a contract for deed to provide for installment payments for a short period of time to give a buyer an opportunity to obtain a mortgage later to purchase the property outright. In this situation, the contract for deed will provide for monthly payments for a year or two, and then the contract for deed will “ balloon”, which means the contract will become due and payable in full. The parties usually anticipate that when the contract for deed balloons, the buyer will have obtained a mortgage to purchase the property and can use the proceeds from the mortgage to satisfy the balloon payment on the contract for deed.
A seller satisfies a contract for deed by giving the buyer a deed for the property at the time the contract is paid in full.