A contract for deed is a form of seller financing where the seller sells real property in exchange for installment payments over time. In Minnesota, contract for deed transactions are governed by a statutory framework transferring all but an equitable interest in property to the buyer. The buyer is responsible for all aspects of the home (taxes and insurance), repairs, etc. after the contract for deed is signed and filed with the appropriate county office. The buyer usually pays the seller in monthly installments over a number of years and only receives their deed upon full payment of the contact. For more details on contract for deed options, see here. One of the most common questions our office sees regarding contracts for deed, is what happens if the buyer gets behind on payments.
If a buyer is behind on payments, the first tip is “Don’t Wait!” As a seller, you should almost immediately initiate cancellation proceedings. To cancel a contract for deed, it takes at least 60 days. You are required to personally serve a notice of cancellation on the buyer and then 60 days later (there are a few exceptions) the contract is terminated. The good thing for sellers in this situation is they are able to retain the all amounts paid under the contract (Extra tip: this is one reason to negotiate for a decent downpayment as a seller). The bad news: usually when your buyer isn’t paying, it is because they can’t afford to and it may be difficult to ever collect. Each day the buyer remains in the property will cost you money. If you are a “nice guy” and wait two or three months before serving your notice of cancellation, you have to wait another two full months to force the buyer out and actually cancel the contract. Even worse, if the buyer doesn’t leave after the 60 days, they are considered a hold over tenant and you need to move forward with eviction to forcibly have them removed. A quick eviction in Minnesota takes another 14 days, but more realistically 30 days. During this entire time, you will be loosing income you could generate from the property.
Another reason not to wait, it’s no skin off your back to start the cancellation process. The statute requires that in order to cure the buyer needs to pay all amounts past due, plus the cost of service, plus attorney’s fees, plus 2% of the delinquent amount in order to fully cure. When we assist clients in preparing contracts for deed, I make sure the buyer is very aware of this in attempt to prevent “lazy” delinquents.
A related question: Do I need an attorney to prepare a cancellation? Of course, the standard attorney answer is always, “yes”. Our office tries to be honest in letting people know when the risks are low they may consider trying things on their own. But, in this case, it is strongly encouraged to use an attorney. The cancellation statute is very particular. For example, it even dictates what size font the notice of cancellation needs to be in. An attorney will make sure the right amount of delinquency is calculated, the proper recording information is included in the notice of cancellation, the cancellation is served correctly and most particularly, and the exact statutory language is used and followed. And, because the buyer is on the hook for attorney’s fees, why wouldn’t you make sure it is done right the first time?
Don’t forget to record the notice of cancellation after the time period has run. To fully effectuate the cancellation the notice of cancellation, affidavit of service and an affidavit saying the contract was properly cancelled needs to be recorded in the proper county records office.
A final note: Prospective contract for deed sellers, don’t be so turned off by the cancellation process that you don’t fully explore a contract for deed option for seller financing if it interests you. It can be a great option if you are fully aware of your risks and properly vet your prospective buyer.