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Effective: December 1, 2006 |
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19.25.20ar1 - Contracts for Deed and Property Agreements (Archive) |
Archived: October 1, 2008 |
This section provides policy provisions for contracts for deed and property agreements.
Determining the Contract Value - Seller.
Determining the Contract Value - Purchaser.
Contract for Deed - Reasonable Effort to Sell.
A contract for deed is a conditional sales contract for the purchase of real property. It is similar to a mortgage; however:
l Generally, a private party or business, rather than a lending institution, owns the contract for deed.
l The seller of real property via a contract for deed can often sell the contract to another person or persons.
Contracts for deed and other property agreements, such as deeds-of-trust, land contracts and mortgages held by the seller, are considered personal property.
Example:
June resides in an LTCF. She sold her home on a contract for deed. She owns the contract, and the purchaser owns the property.
Action:
The contract for deed is personal property for June.
A person who is the purchaser of property via a contract for deed or other property agreement owns the property, which is real property.
Example:
Tim is purchasing June’s home on a contract for deed. He resides in the home.
Action:
Consider the property to be real property for Tim. It is excluded from the asset total because it is his homestead. The contract for deed has no value to Tim as he is the purchaser.
A contract for deed or other property agreement is unavailable if:
l It is owned in joint tenancy and all owners do not agree to sell the contract or agreement. All owners must agree to sell the contract for deed for it to be available.
l If there is another legal bar to the sale of the contract for deed, consider the contract for deed as unavailable. See Availability of Assets.
l MA Method B and GAMC only: The client is making reasonable efforts to sell the contract for deed.
A contract for deed or other property agreement is available if it is owned with others as tenants-in-common rather than joint tenancy.
l Each owner’s share can be sold separately from, and without the permission of, the co-owners.
l Count the client’s share of the equity toward the asset limit regardless of whether the other owners are willing to sell their shares.
Determining the Contract Value - Seller
For available contracts for deed or property agreements, count the value of the contract or agreement as an asset toward the asset total for the seller.
Note: The value of the contract is the outstanding principal balance, less any encumbrances.
Example:
George and Liz apply for health care for themselves and their three children. They are selling their cabin property, valued at $25,000, on a contract for deed. The balance owed to them on the contract is $15,000. They owe the bank $2000 on the cabin.
Action:
Count the outstanding principal, $13,000, toward George and Liz’s asset total. The calculation: $15,000 outstanding principal - $2000 bank mortgage = $13,000.
Example:
Lee sold his home on a contract for deed. The principal balance on the contract is $30,000. Lee still owes $20,000 on a first mortgage on the home.
Action:
Count the outstanding principal of $10,000 toward Lee’s asset total. The calculation: $30,000 principal balance - $20,000 mortgage = $10,000.
Payments on the contract received by the seller will:
l Decrease the outstanding principal balance for the seller. This is considered a conversion of assets from one form to another.
Note: Review payments made at renewal. Do not determine this conversion monthly.
l Increase the value of the property for the purchaser.
l Count as income for the interest portion of a payment to the seller.
l An amortization schedule requested from the client will help determine the value of the contract and the monthly changes in principal and interest payments.
Example:
George and Liz receive a monthly payment of $500 from the buyer of the cabin sold via contract for deed. $300 of the payment is applied to the principal. The outstanding principal of the contract is $13,000.
Action:
The principal portion of the payment, $300, is considered a conversion of assets from one form to another, and is not counted as income. The payment reduces the outstanding principal of the contract from $13,000 to $12,700. The other $200 of the payment is considered income for George and Liz.
Determining the Contract Value - Purchaser
A client who purchases an actual contract becomes the seller, and should have the value of the contract determined following policy provided in Determining the Contract Value - Seller. These purchases must also be evaluated as transfers. See Purchases as Transfers to determine if this transfer is improper.
Example:
Colleen is the seller of a property via contract for deed. Rondell is purchasing the property via the contact for deed from Colleen. Dylan buys the contract from Colleen for $150,000.
Action:
The contract for deed is now owned by Dylan, with Rondell continuing to be the purchaser of the property. Evaluate the contract for deed as an asset when determining Dylan's eligibility. It must also be evaluated as a possible transfer of assets for Dylan.
For the purchaser of property via a contract for deed or other property agreement, count the portion of the principal paid as an asset, unless it is excluded, or unavailable.
Example:
Peter is purchasing non-homestead property via a contract for deed. He has paid $10,000 on the principal portion of the contract, which is counted toward the asset total. He makes a payment of $500 each month on the contract for deed. $300 of the payment is applied to the principal balance and $200 toward interest.
Action:
Peter’s asset total increases by $300 each time a payment is made because his equity in the real property increases with each payment.
For more information on how to evaluate real property for the purchaser, see Real Property.
Contract for Deed - Reasonable Effort to Sell
Reasonable effort to sell applies only to MA Method B and GAMC.
A property agreement is considered unavailable due to reasonable effort to sell, if a client can verify all of the following criteria:
l Client must contact at least two businesses or individuals that routinely engage in the business of buying contracts for deed or property agreements and offer the contract for sale.
l Advertise the contract for deed in the official county newspaper, the newspaper with the largest circulation in the county, or the local shopper newspaper.
l Accept any offer to buy the property agreement that is at least two thirds of its value, only after determining that the property may not sell for more.
l Continue reasonable efforts to sell until the contract for deed is sold.
Example:
Alice applies for MA. She is the seller of a contract for deed with a principal balance of $72,320. There are no encumbrances. The county worker advises Alice that she must make reasonable efforts to sell the contract because the principal balance will put her total assets over the asset limit. Alice verifies that she placed an ad in the newspaper offering the contract for sale. She also contacted two parties who had advertised an interest in purchasing contracts for deed. The highest offer she received was at a 40% discount or $43,392.
Action:
The offer is less than two thirds of the principal balance, and Alice is not required to accept the offer. She must continue to make reasonable efforts to sell.
Example:
George was approved for MA after demonstrating a reasonable effort to sell his contract for deed. At the time of his annual renewal, he has not advertised the contract for nine months.
Action:
George must be advised that he must initiate and document reasonable efforts to sell the contract within 10 days. If he fails to do so, the outstanding balance less any encumbrances will be counted toward his asset total.