New Notice Requirements for Residential Contracts for Deed

During the recession of the last several years, the amount of financial institution-owned real property reached historically record levels. As the economy continues to improve we are seeing, for the first time in a long time, financial institutions selling more OREO property than they are acquiring. Through this, one interesting trend is that financial institutions are selling a significant number of these properties on a contract for deed basis.

A contract for deed can be appealing to sellers of real property for a number of reasons. For one, selling on a contract for deed basis greatly widens the market of available purchasers, as many prospective purchasers are unable to qualify for conventional note-mortgage financing. Further, a seller’s remedies upon default of a contract for deed are significantly more favorable than a mortgagee’s remedies upon default of a mortgage. For example, foreclosure of a mortgage by advertisement typically takes eight (8) months from start to finish. That timing can be significantly longer if the foreclosure is done by action, if the mortgagor has a 12-month redemption period, or if unexpected issues arise in the foreclosure process. However, a contract for deed can be effectively cancelled under Minnesota law, in most cases, by providing just 60 days’ notice following a default. Selling on a contract for deed basis can be especially appealing to financial institutions since, under Minnesota statutes, payments due to a financial institution as a contract for deed seller are excluded from the total liabilities of the purchaser owing to the financial institution for purposes of determining legal lending limit.

Although contracts for deed are often a great option for both seller and purchaser, there seems to be a growing perception that contracts for deed purchasers do not always understand the ramifications of the transaction and that some contract for deed sellers are taking advantage of misinformed contract for deed purchasers. In January of 2013, the Minneapolis Star Tribune ran an article titled “Contract for deed can be house of horror for buyers” which, as its title suggests, discussed some of the pitfalls being realized by contracts for deed purchasers. The article can be found online here. In an effort to address many of the same issues discussed in the Star Tribune article, during the last legislative session, the Minnesota legislature passed Minn. Stat. § 559.202, which requires “multiple sellers” of residential property on a contract for deed to provide new notices to contract for deed purchasers.

The new notice requirements under the statute, which take effect August 1, 2013, apply only to “multiple sellers” of residential property on a contract for deed basis. Essentially, a “multiple seller” is any person or institution that has acted as a seller in four (4) or more contracts for deed involving residential real property during the preceding 12-month period. Therefore, each time a financial institution is intending to sell residential property on a contract for deed basis, the financial institution should look back at the preceding 12-month period to determine if it has sold at least four (4) residential properties on a contract for deed during that period. If it has, the notice is required. Financial Institutions may consider including the notice on all residential contract for deed transactions to avoid having to determine if it qualifies as a “multiple seller” for each individual transaction. Note that for purposes of determining whether a financial institution qualifies as a “multiple seller”, the financial institution and any subsidiary entities of the financial institution (i.e. a subsidiary set up to hold OREO property) should be treated as one entity.

If there is a purchase agreement, the required notice must be affixed to the front of the purchase agreement, and the contract for deed cannot be executed for five (5) business days following the execution of the purchase agreement and the delivery of the notice. If there is no purchase agreement, a multiple seller must deliver the notice in a document separate from any other document or writing to the prospective purchaser no less than five (5) business days before the prospective purchaser executes the contract for deed.

The notice aims to better inform prospective contract for deed purchasers of some of the potential risks of purchasing on a contract for deed. Here are just some examples of the language required to be included in the notice:

“A contract for deed is a complex legal agreement. You are NOT a tenant. Mortgage foreclosure laws don’t apply.”

“After some time, you may need to make a large lump sum payment (called a “balloon payment”). Know when it is due and how much it will be. You’ll probably need to get a new mortgage, another financial arrangement, or pay for the balance in cash at that time.”

“If you miss just a single payment or can’t make the balloon payment, the seller can cancel your contract. You will likely lose all the money you have already paid. You will likely lose your ability to purchase the home. The seller can begin an eviction action against you in just a few months.”

The statute is very specific regarding the contents of the notice and the manner in which it is provided to the purchaser. For the sake of brevity, a full summary of the statute could not be included in this article. Accordingly, the full statute should be reviewed to ensure compliance. The entire 2013 Minnesota Session Laws, which include the statute discussed here (Minn. Stat. §559.202) can be reviewed online here.

Note that these new notice requirements are in addition to the other laws regulating contract for deed transactions, including those laws that apply specifically to financial institutions selling OREO property on a contract for deed basis.

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