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2.3.3.2.7.5 Contract for Deed and Other Property Agreements

This section provides policy provisions for contracts for deed and other property agreements. The analysis for contracts for deed is used to evaluate all property agreements.

Contract for Deed

A contract for deed is a conditional sales contract for the purchase of real property. It is similar to a mortgage; however:

Generally, a private party or business, rather than a lending institution, owns the contract for deed.
The seller of real property via a contract for deed or other property arrangement can often sell the contract to another person(s) or entity.

Property Agreement

A property agreement is a pledge or security of particular property for the payment of a debt or the performance of some other obligation within a specified period. Property agreements on real estate generally are referred to as mortgages but also may be called real estate or land contracts, contracts for deed, deeds of trust, etc.

Contract Creditor (Seller)

Contracts for deed and other property agreements, such as deeds-of-trust, land contracts and mortgages held by the seller, are considered a liquid asset to the seller (creditor). The property itself is not an asset for the seller because the contract seller cannot legally convert it to cash while it is encumbered by the contract for deed. If payments received by the seller consist of both principal and interest, only the interest portion is income. The principal portion of the payments received is treated as a conversion of an asset, so is not income.

Determining Availability of a Contract for Deed or Other Property Agreement – Seller

A contract for deed or other property agreement is unavailable if:

There is a legal bar prohibiting the sale of the contract for deed or other property agreement.
The person is making reasonable efforts to sell the contract for deed.

Asset Value of the Agreement – Seller

For a seller, the value of a contract for deed or property agreement is its outstanding principal balance less any encumbrances, unless the person furnishes evidence that it has a lower cash value.

An amortization schedule can be used to determine the outstanding principal balance and the interest income if the terms of the agreement are known.

Contract Debtor (Buyer)

A person who is the buyer of property by a contract for deed or other property agreement has an equitable interest in the real property and usually has the right to occupy the property. The buyer generally will not receive title to the property until payments are complete under the contract.

Asset Value of the Agreement – Buyer

For a buyer, the contract for deed or other property agreement is an encumbrance against the real property, not an asset.

A person’s equity interest in a home subject to a contract for deed is excluded as a homestead.
A person’s equity interest in real property subject to a contract for deed that is not a home is considered an available asset unless the property is determined to be an unavailable asset or the person is making reasonable efforts to sell the property.
Reverse mortgages allow owners to convert some of the equity in their homes to cash. Because the payments received from a reverse mortgage are actually a loan against the equity of the borrower’s home, such payments are treated as an encumbrance, not as a counted available asset.

Purchase of Interest in a Contract for Deed

A person who purchases the seller’s interest in a contract for deed or other property agreement acquires the seller’s right to receive payments pursuant to the contract for deed. This is considered a conversion of assets for the seller and the interest of the payments is income for the buyer.

Reasonable Effort to Sell Contract for Deed or Other Property Agreement

A contract for deed or other property agreement is considered unavailable due to reasonable effort to sell if a person can verify all of the following criteria:

Attempting to sell the property agreement, which means:
- The person must offer the agreement for sale, a minimum of two times, to two separate businesses or individuals that routinely engage in the purchase of interest in property agreement, and
- Advertise the agreement for sale using one or more public forms of advertisement available to residents of the geographic area where the property is located.
List the agreement for the appropriate price. The value of the agreement is the principal balance, less any encumbrances, unless proof of lesser value is provided..
The owner must not reject any reasonable offer to buy the property agreement.

Reasonable efforts to sell the property agreement must continue until the property agreement is sold in order to continue the exclusion.

What is a reasonable offer?

A contract creditor (seller) must attempt to get offers for the principal balance of the contract, less encumbrances, or the verified lesser value of the contract if the seller disputes the value.

No minimum length of time is required for an owner to try to get offers. The reasonable length of time is based on the local market, or time period designated in a real estate contract.
The property agreement must be offered for sale on the open market before the owner may accept an offer lower than the principal balance of the agreement, less any encumbrances.
An offer for less than two-thirds of the principal balance of the agreement, less encumbrances, is not considered reasonable.

Legal Citations

Minnesota Statutes, section 256B.056, subdivision 1a