With credit requirements tougher for would-be home purchasers more people have been turning to a contract for deed to achieve the American dream of home ownership.
But that dream often turns to despair as buyers find themselves paying far more than a home is worth, paying high interest rates and being surprised by old liens against the property.
The recession-driven increase in contract-for-deed deals created a rich market for con artists and unscrupulous property owners. An investigation by the Star Tribune early this year showed that most of the deals they reviewed carried high interest rates, large balloon payments and other contract gimmicks that virtually guaranteed a buyer would default. The sellers often profited from the payments made by buyers, then got the home back and started the process again with a new buyer.
A new law taking effect Aug. 1 will bring more transparency and honesty in contract-for-deed deals. Sellers will have to spell out the potential drawbacks of the sale and will have to suggest prospective buyers get an appraisal and inspection before finalizing the contract for deed.
The law doesn't provide the kinds of protections would-be buyers get when they go through a bank for a traditional home purchase. In those cases the bank has a financial interest in ensuring the home's title is clear, the purchase price is in line with the value of the home and that a property is inspected to flag any major problems. Banks are also required by law to provide myriad details of the terms of the loan repayment and associated costs.
The new law is tempered in that it only targets "multiple sellers," defined as individuals or companies that sell at least four residential properties by contract for deed in a 12-month period. Those multiple sellers were identified as the main cause of most of the dishonest contracts. Those honest homeowners who simply want to use a contract for deed to make it easier to find a buyer won't be burdened with new regulations.
While the new law is helpful, the concept of "buyer beware" must still reign with those looking to get into a contract for deed. Prospective buyers need to be sure they fully understand the contract they are getting into, have the property appraised and inspected, and seek out some professional help if they are uncertain about the deal.