People who buy a home using a contract for deed will now have a longer cancellation period to make up unpaid monthly payments after new rules went into effect Aug. 1.
Passed in this last legislative session, the new regulations were born out of investigations by the Sahan Journal and ProPublica about the predatory uses of contracts for deed in the Somali community.
The new regulations go beyond giving more time for late payments and will provide a whole framework of protections to homebuyers using the alternative financing mechanism and more strictly regulate “investor sellers.”
Among the new rules is that the burden for recording the contract is now on the seller. Among the 26 states that require recording of contracts for deed, before Aug. 1, Minnesota was the only one where the buyer was required to make the recording.
As for the amount of time now given to a buyer to make late payments, Colleen Daly, a staff attorney in the seniors unit for the nonprofit Mid-Minnesota Legal Aid, said the previous required cancellation period for a contract for deed was 60 days. Now a seller must give 30 days’ notice before the new 90-day cancellation period commences, essentially doubling the time given to a buyer.
As for requirements among sellers, Daly said the new framework mostly targets investor-sellers people who take out a mortgage on a property with the intent to sell to someone through contract for deed rather than one-time sellers.
Daly said if an investor seller cancels a contract in the first four years, the buyer must get refunded any portion of their down payment that is more than 10% of the purchase price. For example, if $100,000 is put into a $250,000 home and the contract is canceled, the buyer should get back $75,000.
“There’s also other protections,” Daly said, “If [the owner] didn’t record the contract, they can’t cancel the contract. If there’s violations of the statute, the buyer can get damages and attorneys fees if [the seller] didn’t make the right disclosures, disclose about a mortgage that exists and the buyer gets a 10-day right to cancel after they get all the disclosures.”
Last month, the Pew Charitable Trust published research about the risks homebuyers might face entering a contract for deed. Among the risks is that often homes bought in contract for deeds are uninhabitable and the requirement that buyers pay property taxes even though they do not have a title to the home. Pew published earlier in the year a map that showed the number of recorded contracts for deed in each state Minnesota had the fourth highest amount in the nation. Three other Midwest states Michigan, Ohio and Wisconsin filled out the top three. However, Pew’s research estimates that there are about 200,000 contracts for deed that are simply never recorded.
Tara Roche, a Pew project director and author of the Pew study, said the reason Minnesota and the rest of the Midwest has so many contracts for deeds is because of redlining practices that excluded Black and Brown and other homebuyers of color from receiving mortgage credit.
Minnesota’s DFL Sen. Tina Smith and Wyoming’s Republican Sen. Cynthia Lummis have put forward legislation that would federally regulate certain aspects of contracts for deeds. According to Roche, it would require all contracts be recorded and it would grant some foreclosure protection to buyers.
“Our position is people shouldn’t be treated differently just because of the kind of financial arrangements they used to buy their homes,” Roche said, though she says state governments are better positioned to make changes based on local needs. “It would be a great step forward to have a national floor for consumer protections that states can then build off of.”
Smith’s office did not respond to a request for comment.
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