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Minnesota contract for deed information mnhomescontractfordeed.com

April 13th 2012

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Contract for deed legal definition

April 08th 2012

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A contract for deed allows the seller and purchaser to elect specific requirements concerning purchase price, interest, and payment terms. Also, fees related to insurance and taxes can be set in the direction of seller or the purchaser at their option before the signing of the agreement. A deed is the written document which transfers title (ownership) or an interest in real property to another person. The deed must describe the real property, name the party transferring the property (grantor), the party receiving the property (grantee) and be signed and notarized by the grantor. To complete the transfer (conveyance) the deed must be recorded in the office of the County Recorder or Recorder of Deeds. There are two basic types of deeds: a warranty deed, which guarantees that the grantor owns title, and the quitclaim deed, which transfers only that interest in the real property which the grantor actually has. The quitclaim is often used among family members or from one joint owner to the other when there is little question about existing ownership, or just to clear the title. A quitclaim deed conveys only such rights as the grantor has. A warranty deed conveys specifically described rights which together comprise good title.

A deed may be avoided by alterations made in it subsequent to its execution, when made by the party himself, whether they are material or immaterial, and by any material alteration, even when made by a stranger. The disagreement of those parties whose assent to the transfer is necessary may invalidate the deed. For instance, in the case of a married woman, by the disagreement of her husband or by the judgment of a competent tribunal.

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Types of Deeds:

Warranty Deed - If a deed is intended to be a general warranty deed, it should contain a phase specified by state law such as the phrase "conveys and warrants". These words, called operative words of conveyance, carry with them several warranties which the grantor is making to the grantee. Examples of the warranties are:

First, the grantor warrants that the grantor is the lawful owner of the property at the time the deed is made and delivered and that the grantor has the right to convey the property.

Second, the grantor warrants that the property is free from all encumbrances or liens.

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Third, the grantor warrants that he or she will defend title to the estate so that the grantee and the grantee's heirs and assigns may enjoy quiet and peaceable possession of the premises with the power to convey the property. Quitclaim Deed - A quit claim deed conveys to the grantee and the grantee's heirs and assigns in fee all of the legal or equitable rights the grantor has in the property that existed at the time of the conveyance. An example of operative words of conveyance are "convey and quit claim." There are no warranties of title.

Special Warranty Deed - In contrast to a general warranty deed, a special warranty deed limits the liability of the grantor by warranting only what the deed explicitly states. A special warranty deed has practically the same effect as a quitclaim deed. Special warranty deeds are generally used by corporations or other entities that want to avoid assuming the liability of a general warranty deed. Like the general warranty deed, the special warranty deed should contain the appropriate language such as "conveys and specially warrants." Usually, the grantor warrants that he or she did nothing to impair title during the period the grantor held the title. While a special warranty deed may contain covenants of title, these covenants will usually cover only those claims arising by, through, or under the grantor.

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Fiduciary Deed - This is a deed to be executed by a fiduciary such as a trustee, guardian, conservator, or similar person in their appointed capacity.

Terms Common to Deeds:

Grantor - The person who owns the property and executes the deed conveying the property to another person. This can be one or more persons, a corporation, limited liability company (LLC), partnership or other entity.
Grantee - The person who receives title to the property. The grantee can be one or more persons, a corporation, LLC, partnership or other entity.
Consideration - The value given to the grantor by the grantee in exchange for the conveyance. Some states include the exact consideration in the deed and others do not but instead include a statement of consideration as being 10.00 and other good and valuable consideration.
Operative Words of Conveyance - These are state specific and generally are statutory. They show intent to transfer present title. As previously mentioned, examples are "conveys and warrants", or "convey and quitclaim" or convey and specially warrant".
Legal Description - The legal definition of the property being conveyed. This is contained in the deed where the grantor obtained title to the property and should be used in the deed where the grantor conveys the property exactly as written in the grantors deed unless not all of the property is being conveyed.
Life Estate - A life estate is where a person owns all the benefits of ownership in the property during their life, or the life of another, with the property going to a remainder person after the death of the life tenant.
Tenants in Common - This is how two or more people (co-tenants) may take title to property who intent their share in the property to be separate from the other on death. On the death of the tenant in common the deceased persons ownership in the property is left to his or her heirs or as specified by Will. Compare to Joint Tenants. If tenant in common ownership is desired the deed usually provides, "to Grantees, A and B, as tenants in common and not as joint tenants".
Joint Tenants with Rights of Survivorship - This is how two or more persons may take title to property when the parties want the entire ownership to go to the survivor instead of the heirs of the survivor. On death of a joint tenant with rights of survivorship, the entire interest of the deceased co-tenant goes to the surviving co-tenants. Compare to Tenants in Common. It is common for husband and wife to take title as joint tenants with rights of survivorship. If joint tenant with rights of survivorship ownership is desired, the deed usually provides, "to Grantees, A and B, as joint tenants with rights of survivorship and not as tenants in common".
Community Property - In community property states, special laws govern how property is owned between husband and wife.
Reservation Clause - This is a provision of a deed where the grantor may reserve some right in the property such as mineral rights.
Exception Clause - This is a clause in a deed were exceptions to title conveyed may be listed. Example, "Less and Except a prior reservation of all oil, gas and mineral rights in the property conveyed."
Subject to Clause - This is a clause in a deed where property useage rights may be states. Example: "Subject to all rights of way, easements and protective covenants of record".

Execution and Acknowledgments

Execution - A deed must be in writing and signed by the grantor(s). Generally, deeds conveying a homestead estate must also be signed by the grantor's spouse.
Acknowledgments - In addition to the signature of the grantor(s), deeds must be acknowledged to be recorded and acceptable as evidence of ownership without other proof. Each state has special acknowledgment forms.

Procedural Requirements

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Name, Address, phone - The names of the grantor and the grantee should appear on the deed. The address and phone numbers are also usually included.
Recording or Filing Place - Generally, deeds should be recorded in the county in which the real estate is located. Although generally a deed does not have to be recorded to be a valid conveyance, there are practical reasons for recording a deed. Deeds usually do not take effect as to creditors and subsequent purchasers without notice until the instrument is recorded. Thus, unrecorded deeds may be void as to all subsequent creditors and subsequent purchasers without notice until they are filed for record. Recording a deed places subsequent purchasers on constructive notice in that subsequent purchasers are deemed to have actual knowledge of any recorded instrument. Some states are "race-notice" states, which means that the first grantee without notice to record a deed to property will be protected against the interests of other grantees with unrecorded deeds to the same property.
Acceptance and Delivery - Another element of a valid deed is that the deed must be delivered and accepted to be an effective conveyance. Most states assume delivery if the grantee is in possession of the deed. The deed also must be accepted by the grantee. This acceptance does not need to be shown in any formal way, but rather may be by any act, conduct or words showing an intention to accept such as recording the deed
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Minnesota contract for deed information-how a contract works in mn

April 06th 2012

Mortgages and Contracts for Deed

Phillip L. Kunkel, Jeffrey A. Peterson, Jessica A. Mitchell

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INTRODUCTION

Purchases of farm real estate are commonly financed with a contract for deed or mortgage. The choice between a mortgage and contract for deed depends on a number of factors, including the rights of the lender or seller in the event of a default by the buyer. This fact sheet explores the legal differences between the use of real property to finance debt through mortgages and contracts for deed in Minnesota. For a discussion on the use personal property to finance debt see fact sheet Security Interest in Personal Property.

MORTGAGES

In a typical mortgage transaction, the buyer of the land (also known as the mortgagor) signs a promissory note, which is a promise to pay money, to finance the purchase. For a detailed discussion on promissory notes see Contracts, Notes, and Guaranties. As collateral for the note, the buyer executes a mortgage on the land to the lender (also known as the mortgagee) and the lender pays the seller of the property in full. The buyer obtains a deed to the property, but the lender has a lien-or claim-on the property as documented in the mortgage. The mortgage on the land give the lender the ability to foreclose on the property if the buyer defaults on the note. For a detailed discussion of the foreclosure process see Mortgage Foreclosures.

Recording – Mortgages are typically recorded in the office of the county recorder where the property is located. Recording gives notice to the public of the mortgage. If mortgage is not recorded properly, the lender's rights in the property with respect to other creditors may be at risk.

Seller as Mortgagee – The mortgagee is not always third-party lender but may be the seller. If the seller agrees to finance a portion of the sales price by means of a mortgage, the buyer will usually make a down payment on the land and execute a mortgage with the seller for the balance of the purchase price. In such a case, this mortgage is known as a purchase money mortgage. A purchase money mortgage given by the mortgagor at the same time he takes a deed from the seller, has priority over any other claim attaching to the property as a result of his ownership in the property. Thus any liens, such as preexisting judgment liens, that relate to the purchaser and attach to the interest he acquires in the land are subordinate to the lien of the mortgage given by him to secure payment of the purchase price. This is an exception to the general rule in Minnesota whereby priority of interests in real estate is determined, in the absence of actual knowledge, by the date when the mortgage was recorded.

Legal Title – Under Minnesota law, even though a mortgage is a conveyance, legal title to the mortgaged property is not transferred to the lender. Minnesota is classified as one of the so called lien theory states. In lien theory states, the mortgagee has no right to possess the property, but merely has the power to sell the property in connection with a foreclosure.

Rents – As a general rule, a mortgagee is not entitled to the rents derived from mortgaged property. Minnesota law, however, allows a mortgagor of agricultural property to assign the rents to a lender as additional security for the debts secured by the mortgage if the assignment was executed, modified or amended after August 1, 1977; if it secures an original principal loan of $100,000 or more; and if it is not a lien on property that was homesteaded entirely as agricultural property.

Attachments – Issues can arise in the case of agricultural real estate with respect to whether a mortgage covers personal property that has become attached to the real estate. Whether such personal property (such as concrete or Harvestor silos or dairy piping systems) has become so attached to the real estate as to become part of the real estate and thus nonremovable is a question that must be determined by a court based on the facts and circumstan¬ces of each case. In general, the controlling consideration will be the intentions of the parties, which are determined by evaluating the nature of the property that has become attached to the real estate, the method of attachment and the extent to which the property is tied to the use of the real property. If the court determines that the personal property has become attached to the real property, the lien interest of the mortgagee will attach to the personal property even though the personal property is not specifically described in the mortgage. To avoid such issues, the parties to a real estate mortgage should stipulate in the mortgage whether certain items of personal property will become part of the real estate subject to the mortgage.

Crops – Closely related to the issue of attached property is the question of whether a mortgage covers crops growing on land that is subject to a real estate mortgage. Crops are personal property and usually not covered by a mortgage or contract for deed. To obtain a lien on crops, a lender must comply with the provisions of the Uniform Commercial Code with respect to such claims. These requirements are set forth in detail in another fact sheet in this series, Security Interests in Personal Property. Unless a lender complies with the rules relating to such liens, a lien against crops cannot be based on the real estate mortgage.

Default – The terms of the mortgage define what constitutes a default. In general, a buyer will be in default by failing to make a mortgage payment, failing to pay property tax or insurance, or failing to use the property in a way specified by the mortgage.

Options upon Default – A mortgage generally provides that upon a default of the mortgagor under the terms of the mortgage, the mortgagee has the option to accelerate the indebtedness, foreclose the mortgage, sell the mortgaged premises and use the proceeds from the sale to pay the debts secured by the mortgage. The procedures in Minne¬sota for foreclosing a real estate mortgage are discussed in detail in the fact sheet, Mortgage Foreclosures.

A mortgage generally includes a provision known as a power of sale clause. This clause allows the mortgagee to foreclose without instituting a lawsuit. Without such a clause in a mortgage, the mortgagee must initiate a lawsuit in order to foreclose its mortgage.

Besides the power of sale, a real estate mortgage will typically include an acceleration clause that provides for the acceleration of the debt in the event of default in payment. Such clauses are contained in both the promissory note and the real estate mortgage that secures the note. A promissory note and a mortgage are separate instruments that are different in nature and purpose. They are enforceable independently of each other on their own terms. Thus, should a lender desire to do so, it may enforce the promissory note independently of the mortgage, and it is not required to first foreclose the real estate mortgage. An action can be brought against the mortgagor based on the promises contained in the promissory note to make the payments required by the note.

Most mortgages also contain clauses known as due on sale clauses which permit acceleration of the debt in the event the mortgagor transfers an interest in the property without the prior consent of the mortgagee. Such due on sale clauses can be used to prohibit the assumption of the loan by a subsequent borrower.

Extinguishment and Satisfaction – A real estate mortgage is a conveyance as security for the payment of money or the performance of some duty. The conveyance may be nullified upon the payment of money or the performance of the prescribed duty. Thus, when the loan that is secured by a mortgage is paid in full, the interest, or lien, of the lender is extinguished. When the mortgage debt is paid, the mortgage is discharged and the mortgagee has no further interest in the land. At this time, the mortgagor is entitled to a "satisfaction of the mortgage" certificate. The lender must provide the certificate to the buyer within ten days of its request. This satisfaction certificate should be recorded with the county recorder so that the mortgage will be extinguished in the county records. Until this is done, the recorded mortgage will remain as a cloud on the title.

Divisible Lots – Occasionally, when a tract of land consisting of divisible lots or parcels is mortgaged to secure a single debt, the mortgagor may sell some of the property to one or more buyers who take title to the land. Unless a partial release of the mortgage is obtained, the buyers of the separate parcels take title to the property subject to the first mortgage. In the absence of an agreement in the mortgage or an agreement between the mortgagor and mortgagee provid¬ing for partial releases, the mortgagor has no right to compel the mortgagee to give a partial release of a portion of the real estate from the mortgage.

Farmer–Lender Mediation – Where a mortgage encumbers agricultural real estate, Minnesota's farmer-lender mediation statute generally requires the lender to offer mediation of the debt to the borrower prior to beginning foreclosure proceedings. The farmer-lender mediation statute began requiring mediation in 1986, with the statute's expiration date being extended in the years following original passage. Generally, the statute requires that a creditor seeking to collect a debt affecting agricultural property, including real estate and certain personal property, to offer the borrower the opportunity to mediate a resolution to the debt prior to the lender's resort to collection action against agricultural property. Such action can include mortgage foreclosure, contract for deed cancellation, seeking possession of personal property or executing a judgment. Where the debt involved has been scheduled by the borrower in a bankruptcy or involved in a previous farmer-lender mediation, the debt is not subject to the farmer-lender mediation statute and the lender can seek collection remedies without first offering mediation.

CONTRACTS FOR DEED

Whereas the mortgage is widely used when a lending institution is involved, the contract for deed is frequently used in transactions between private parties. A contract for deed is also known as a "land contract" or "installment land contract." In a contract for deed, the seller, rather than a lending institution, finances the buyer's purchase of the property. The buyer takes immediate possession of the property and agrees to pay the purchase price of the property in monthly installment. The seller retains the legal title to the property until the last payment is made and the contract is fulfilled.

Benefits to the Buyer – This type of arrangement is attractive to buyers who might not otherwise quality for a loan. In many cases, a buyer will enter into such a contract because, without such an arrangement, they would not be in a financial position purchase the property. The buyer may also be able to purchase the property with a relatively low down payment. Also, in the event of a default in payments, the buyer need only bring payments current within the time period provided by state law to preserve his equity in the property. This is in contrast to most promissory notes containing acceleration clauses, in which upon default the buyer is responsible for the entire amount remaining under the loan. Contracts for deed are also faster and less costly to finalize than traditional mortgages discussed above. Closing costs, origination fees, and application costs are nonexistent.

Risk to the Buyer – A contract for deed does not come without risk for the buyer. Because the seller keeps legal title to property until the contract price is paid in full, the buyer does not become the owner of the property until he completes his payment obligations and receives title from the seller. If the buyer defaults on the contract, the buyer runs the risk of losing all of the money that he has paid on the contract.

Benefits to the Seller – At least on the surface, the contract for deed is attractive to seller because is relatively simple to understand and appears to afford the seller a quick method of canceling the transaction in the event of a default. Contract cancellation procedures are set forth in detail in another fact sheet in this series, Termination of Contracts for Deed. In general, if the buyer defaults on an installment, the seller (also known as the vendor) can cancel the contract, retake the land, retain the payments made and benefit by any improvements that have been made on the premises by the buyer (also known as the vendee). The seller may do this without a foreclosure sale or judicial action. The seller may alternatively elect to sue the buyer on the contract.

Risks to the Seller – Contracts for deed also places some risk on the seller. The seller runs the risk of not completing ridding itself of the land for many years. If the buyer defaults, the seller will have to take action and may end up taking back the land.

Recording – The buyer must record the contract for deed with the county recorder where the land is located within four months after the contract is signed. Contracts for deed must provide the legal name of the buyer and the buyer's address. Buyers who fail to record the contract within that time are subject to a civil penalty equal to 2 percent of the principal amount of the contract debt.

Contractual Rights and Remedies – The contract for deed is a contract and many of the rights and remedies of the parties are based solely on the provisions contained in it. Provisions such as the time, the place and the amount of payment indicate the continuing contractual relationship between the parties.

The seller agrees to convey the property to the buyer by a specified form of conveyance, usually a warranty deed, once all of the payments are made under the contract, and to furnish an abstract evidencing good title in the seller at the time the contract for deed is executed.

The buyer agrees to pay a purchase price for the property as specified. He also agrees to pay real estate taxes and assessments and to maintain insurance on the premises, including insurance for the benefit of the seller. The buyer also agrees that all buildings and improvements currently on or subsequently added to the land may not be removed, but will remain on the property until the contract is fully performed.

Many other provisions, such as due on sale clauses, contained in a contract for deed are similar to those contained in a mortgage. It may, however, be more common to find a provision in a contract for deed that prohibits the purchaser from prepaying all or any portion of the contract ahead of schedule. The seller may be looking to the contract for deed payments as a source of retirement income and may not desire early payment.

Acceleration clauses are much less common in contracts for deed. There is, however, no legal restriction against including an acceleration clause in a contract for deed. Without an acceleration clause, if a seller wants to forego his claim against the land, he must bring an action for each installment as it comes due under the contract for deed. He cannot accelerate the balance due under the contract.

Nature of the Relationship – Under a contract for deed, the buyer does not own the land but rather acquires an equitable estate in the land. This allows the buyer to occupy and farm the land. Although it is generally considered that the seller retains legal title to the land and is so treated for many purposes, the courts have consistently held that the seller has a security title only and that the buyer is the equitable owner of the property. As such, the relationship is in substance similar to that created by a deed and a mortgage.

Completion of the Contract – When the total purchase price has been paid to the seller, the buyer is entitled to the type of conveyance provided for in the contract. Generally this will require the execution and delivery of a warranty deed to the buyer. When the title to real estate is transferred by a warranty deed, the seller is guaranteeing that he has full legal title in the property subject only to those exceptions specifically noted on the deed. In contrast, a quit claim deed transfers all rights in the property of the seller, but provides no guarantee that others do not have prior claims. Once the purchase price has been paid, the seller must convey legal title to the buyer. If the seller has died or is otherwise unable to make the conveyance, it is the duty of his heirs or representatives to furnish the proper conveyance without any additional cost to the buyer. When the buyer has received the deed from the seller, he should file the deed with the county recorder in the county where the land is located.

Improvements – As noted earlier, improvements a buyer makes on the property may be lost if he defaults on the contract. In the event the buyer plants crops, the crops may likewise be lost if the seller terminates the contract for deed. It is therefore important for a buyer of farmland to make provisions for paying the contract installments during the time that he has growing crops on the land. Otherwise such crops could be forfeited to the seller.

As with the foreclosure of a mortgage, the cancellation of a contract for deed affecting agricultural real estate triggers the provisions of the farmer-lender mediation statute, and may afford the borrower with the right to mediate the debt prior to the lender's starting contract cancellation proceedings

CONCLUSION

The choice between a mortgage and contract for deed depends on a number of factors, including the rights of the seller in the event of a default by the buyer. A farmer should assess the benefits and risks of both financing methods prior to choosing between a mortgage and a contract for deed.

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March 18th 2012

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