The Basics Of Contracts For Deed And Rent To Own Transactions printable pdf download

The Basics of Contracts

for Deed and Rent to Own

Transactions

by Jeffrey C.

O'Brien, Esq.,

Mansfield Tanick

Cohen

n an era of

depressed real estate

values and

tight credit

markets,

financing a

real estate acquisition

be it

single

family residential, multi-family

commercial-

requires

more effort and

creativity

than in the recent

past.

With

banks

reluctant to lend money to people

for projects

deemed

"risky," buyers

and

sellers

wanting to close a deal have

had to resort to two tried and true

meth-

ods

of alternative financing: contracts for

deed

and rent

to own

arrangements.

Contracts for Deed

A contract for

deed

is the seller financed

acquisition of real

estate.

Instead

of a

bank loaning the money to the buyer to

pay the

seller

in full at a closing, the seller

agrees

accept some

amount

of a

down

payment

(to be negotiated between

the

parties)

and periodic (usually monthly)

installments of

principal and interest for

an agreed upon duration of time.

Many

contracts for deed cover a shorter

period

of time than the typical thirty year

fixed

rate mortgage,

with a balloon payment

due at

the

end of the

contract

term.

If all

payments

are

made,

the seller

delivers

a deed

the buyer at the

end

of the

contract term that conveys the title to the

property to the buyer.

If a

buyer

and seller desire

enter

into

such

contract,

it is highly

recommended

that they use the uniform statutory form

contract for deed (and applicable addenda).

Furthermore,

using an

attorney

to assist

on the

transaction

is imperative due to

the many

legal

requirements surrounding

contracts for

deed.

Once signed, the

contract for deed must be recorded

with

the

county

recording

office.

The buyer on

contract for deed

said

to own "equitable

title"

to the property.

the

event that the buyer defaults on

the payments under the contract for

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deed,

the seller must follow

cancellation

process

set forth in

Minnesota Statutes

Section

559.21.

This

statute requires a

sixty day

written

notice of cancellation be

served upon the

buyer.

If the buyer

objects

to the grounds for

cancellation,

the buyer

can proceed with a court action and an

injunction to stop the cancellation from

becoming

effective,

If the buyer takes no

action,

the contract

cancelled. The

It is important to note

that when entering into a

lease with an option to

purchase, Minnesota

courts do

not

enforce

"agreements to

agree."

seller

may

retain

any

payments

previously

received

the

buyer,

and equitable title

to the

property reverts

to the seller.

Rent to Own

In a "rent to

own"

arrangement, the par-

ties enter into a lease agreement

for

the

property,

together with an "option to

purchase"

agreement.

(Or the parties can

include the purchase option within

the

lease agreement

itself.)

Under this struc-

ture the landlord

retains

all

title to the

property, and the tenant pays monthly

rent for a specified

term.

If the

tenant

O'BRIEN

remains

current on his/her

payments,

the

tenant

has

the right to

purchase

the

property

under the

conditions

in the

"option to

purchase"

agreement.

important

to note that when entering

into a lease with an option to

purchase,

Minnesota

courts

do not enforce

"agree-

ments

agree."

vitally important

that the

parties agree

to all

material

terms

of the purchase at the time the lease is

entered

into in

order to avoid future

uncertainty.

is highly recommended

that the parties attach the purchase

agreement to the lease or option to

pur-

chase agreement, as applicable.

Under Minnesota

law,

an option to pur-

chase must be supported by valuable

consideration (meaning

that the party

receiving the option must pay something

to the party granting the option). While

the

facts

and

circumstances

are the

driv-

ing force behind determining what

is a

reasonable option

price,

a good

practice

to require payment of at least

$1,000

from

the tenant/optionee

to the

landlord/optionor.

Consequences

for Associations

These types of

transactions

have

signifi-

cant implications for associations and

association boards when the property

Contracts for Deed continued on page

The Basics Of Contracts For Deed And Rent To Own Transactions

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