Minnesota Contracts for Deeds – key points

A contract for deed is a contract between a buyer and a seller where the seller is providing financing to the buyer.  There are variations to this when an investor participates as a third party buying the CD terms from the seller for a discount.

A seller may want to consider contract for deed terms for a variety of reasons.  It can be a good investment, it can be a means to an end, it can be a way to help a friend or family member purchase a property.  When the seller offers CD terms there will not be a mortgage on the property or the lender has agreed to the CD.  In cases where there is a mortgage with an acceleration clause, an attorney should be consulted.

A buyer considers CD financing when they are unable to use conventional financing.  As lenders tighten their requirements CD financing has become more commonplace.  Some examples of buyers include buyers who are self-employed and buyers who may have a property to sell.  Buyers should meet with a lender prior to signing a CD if their goal is to transition to conventional financing at a later date.

When writing a CD, a Realtor uses CD forms from the MLS.  The main terms that both parties need to align are include:

  1. Sale price
  2. Downpayment – This will be a percent of the sale price, often 20% or more.  A downpayment less than 20% poses additional risk to the seller.  The CD forms include language for a credit check contingency, such that the seller can review the credit of the buyer.
  3. Interest Rate – The negotiated IR will be more than the IR on a conventional mortgage.  In Minnesota, CD rate information is provided monthly by calling 651-297-7053. The max CD rate for April 2011 is 8.640%.  The max rate is +4% of the Federal National Mortgage posted yield for a standard conventional mortgage as posted in the WSJ 2 months prior (in February).   This information is updated monthly.
  4. Time horizon – This can vary from 3 to 30 years.  In most cases, a buyer is using a CD as a stop-gap to get into a property with the intent of qualifying for conventional financing at a later date.    The time horizon in these situations will be 3-5 years where the buyer has agreed to pay the seller a balloon payment at the end of the contract.

There are templates available on excel and numbers (apple) that you can use the inputs above to determine the payment schedule, annual interest and final payoff amount.  These templates are a useful way of getting all parties on the same page with terms.

Entering into a CD contract poses risks for both the buyers and sellers.  A Realtor can help facilitate the transaction and will recommend that attorneys and accountants are consulted prior to signing.

Once executed there are strategies that can be put in place that protect both parties and make the interaction seamless.  Let me know if you would like to discuss contract for deed financing for the purchase or sale of a property.  Ingrid – ifriel(at)therealtyhouse.com

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4 Responses to Minnesota Contracts for Deeds – key points

  1. Andrew Howard says:

    Hello Ingrid,

    Your article is really helpful in understanding contract for deeds. Thanks for writing about the max interest rate. Is the minimum allowable interest rate the standard conventional mortgage interest rate? Also, I saw that you wrote about excel templates were you just need to input the terms of a contract for deed and it will spit out the payment schedule and whatnot. Is a template like this available online? I would like to play with numbers and see what would be feasible for me to offer.

    Thanks,
    Andrew

    • ingridfriel says:

      Hi Andrew,

      Thanks for your kind comments!

      To close the loop, yes there is a minimum IR for a CD. Similar to the max rate, the min rates are posted monthly by the IRS. Here is a link to the most recent published minimum rates – “Applicable Federal Rates” (April 2011)

      http://www.irs.gov/pub/irs-drop/rr-11-10.pdf

      The idea of the minimum IR is to ensure you pay taxes on the transaction vs. add the IR to your sale price for a higher sale price. If you pursue a CD claiming no IR the IRS will apply the AFR to your transaction for tax purposes.

      As for templates, I follow a 2 step process. I use a mortgage amortization template (many availabe in excel) as the key input. Then I make my own table in excel with the following items in the list and add columns for the offers:

      Sale Price
      Downpayment
      Loan Amount
      Interest Rate
      Montly pmt*#of months – from Mortgage Amort template
      Payoff (based on term of loan) – from Mortgage Amort template
      Net (Downpayment+monthly pmts+payoff)

      I haven’t actually found a CD template, but the one I’m describing here works pretty well. I put the buyer vs. seller offers in different colors and compare the net. It is important to know what the buyer is capable of doing in terms of paying off the mortgage. A buyer entering into a CD should meet with a lender to be fully aware of what they can do to payoff the loan at the end of the term. There are serious consequences for a buyer if unable to perform vs the agreed terms.

      I hope this helps. Give me a call or direct email if you want to discuss your specific details.

      ifriel@therealtyhouse.com
      612-750-6392

    • ingridfriel says:

      Hi Andrew,

      I posted a reply on my blog. Yes, there is a minimum which set monthly and varies based on the term of the loan, short vs, long. The IRS will assume this minimum tax rate to tax the seller.

      The template you use is called “Mortgage amortization” it is either built into excel or a free download. It depends on the version you are using.

      Thanks for the question! Keep me posted on how your CD goes or let me know if I can provide help as a realtor to your transaction.

  2. Andrew Howard says:

    Hi Ingrid – Thanks for all the insight. You definitely know your stuff.

    I wasn’t able to find a Mortgage Amortization template in my version of Excel (2003), but I found a download on Microsoft’s web site that works really well. I needed to modify the spreadsheet to add in my down payment, but otherwise it works great.

    http://office.microsoft.com/en-us/templates/mortgage-amortization-schedule-TC001056620.aspx

    I am looking at doing a 7 year CD. Would that be a mid-term or long term period? I’m looking to offer in interest rate of 4.5% – that should be okay, right? (Long term AFR looks like it 4.17% right now, if I’m reading the IRS doc correctly).

    Thanks,
    Andrew

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