Land Contract vs. Warranty Deed

I've bought places on contracts for deeds in the 70s...it was quite common during those periods of high interest rates/difficult to find bank financing...

Minnesota law clearly sets forth the steps that must be taken to terminate a contract for deed. Once a default exists and the seller has decided to terminate the contract for deed, a notice of termination must be served upon the purchaser under the contract for deed. The notice must set forth the following information:

The conditions under which default exists.
The period of time within which the purchaser may reinstate.
A statement that the purchaser must either make payments in the amount owed, plus costs of service, attorneys' fees incurred and other amounts due under the cancellation statute depending on the date of the contract (discussed below); or secure a court order suspending termination of the contract for deed.
The name, address and telephone number of the seller or an attorney authorized by the seller to accept payments.
Certain specific language required by law that notifies the purchaser of the consequences of his failure to comply with the notice.
Special Requirements – For contracts for deed executed on or after May 1, 1980, the notice also must state that the purchaser must pay any additional payments due the seller under the contract for deed through the date payment is made, rather than the date of the notice. For contracts for deed executed on or after August 1, 1985, the notice must state that the purchaser is further required to pay two percent of the amount in default at the time of service of the notice, not including balloon payment, taxes, assessments, mortgages or prior contracts assumed by the purchaser.

For the seller to recover attorney's fees under a contract for deed executed on or before July 31, 1985, some part of the conditions of default must have existed for at least 45 days prior to the date of service of the notice upon the purchaser. For contracts for deed executed on or after August 1, 1985, this period of default is reduced to 30 days.

Notice – The notice must be served upon the purchaser in the same manner as a summons according to the Minnesota Rules of Civil Procedure. Three weeks published notice has the same effect as personal service of the notice upon the purchaser provided that certain procedures are followed, but the cure period is expanded to 90 days where service is by publication. Besides serving the purchaser, serving other parties-such as mortgagees, judgment creditors or other lien claimants-may be required.

Termination – The right of the purchaser to reinstate the contract is absolute, provided that he complies with the payment of all sums required. If the purchaser fails to comply with the notice, the contract will terminate.

Upon termination the purchaser will lose all sums that have previously been paid on the contract, the right to possession of the property and the right to assert any claims or defenses against the sellers. He may be evicted from the premises by the seller. Once the termination has been completed, however, the seller can no longer maintain any action for a deficiency judgment against the purchaser.

The buyer has 60 days.

I couldn't imagine buying land sight unseen...

There are ways to ensure that the contract for deed would be conveyed...one would be to purchase from someone you trust, or come to trust.

It's hard to know where to begin.

If you finance your property and you don't use a CFD, then if the buyer defaults, as many of them do, it's going to cost you about $1,000 in attorney's and other fees, plus three or four months of your time, to get your property back. (If you sell without doing a full credit check, the typical buyer has about a 30% chance of defaulting.)

The CFD is the simple solution, but it holds some pitfalls for the buyer. Primarily this: if you hold title until the buyer pays you off, what assurance does he have that you'll still have title to the property at that time?

Short of his doing a title search every few days, not much assurance at all. Even if you aren't a crook, you can lose the property to debts of your own, accrue back taxes, you might even die leaving the ownership to your heirs - and that all assumes that you're not a crook in the first place.

These concerns can be mitigated somewhat by recording the CFD, but that creates some new problems for you in the event of the buyer's default, that is, clearing the cloud that the defaulted contract leaves on your title.

I have (ahem) invented a solution to this situation which works well for us. We used to be the only one's doing this, which was a little scary, but now enough imitators have started the practice that we feel more confident in the event of a court challenge.

Here's how it works. We prepare a CFD which stipulates that the buyer gets a Warranty Deed to the property after six months of payments. That suggests that they can make the payments and insures that they have built up a small equity in the property before they take title. At the same time as the CFD, we also make out the Warranty Deed and get the buyer to sign a Deed of Trust and Promissory Note, all of which are recorded at the end of the six month period, as well as a Quit-Claim Deed which we hold in the event of default on the DOT.

Recording a two-page document such as a QCD in Missouri costs $27, so foreclosure suddenly doesn't cost so much.

When we terminate a CFD, we simply send a letter after 60 days without payment, giving the buyer 20 days to come current. If the defaulting buyer has received a deed from us, we send this letter certified mail. Those are the minimum requirements. In situations where we can't FIND our buyer, we give it more time, but many times you'll know that the buyer is defaulting long before it actually takes place.

About buying sight-unseen. I've done it myself and we've made a lot of sales that way.

I can probably show you ways to find out more about a property from your desk than you know about the property you're living on now, especially since the advent of Google Earth. Of course, if it's do-able, I always prefer to see the property first hand. From the seller's standpoint, a buyer who's seen the property is much less likely to default.

I can't say for others, and other areas...but a neighbor here sold a 20+ acres piece under land contract, then went into default after pocketing the payments he got from the buyer...

Boatman:

You are correct. A Full Deed of Release needs to be recorded.

I'm currently engaged in getting a deed to property I was buying on a contract. I stupidly assumed a banker would be able to make reasonably sensible decisions, the fellow I was buying from died owing more against the property than I owed him. This could have been avoided had I had the common sense to insist on recording the contract.