How A Contract For Deed Can Help You Buy A Minneapolis Duplex

I recently met with an aspiring duplex buyer with a lot of cash who couldn’t qualify for a mortgage.

It was the second time this year.

How is that possible?

One reason may be a buyer changes careers or goes from being an employee to being self-employed. Lenders often won’t approve a loan until the buyer has an established track record.

Other would-be buyers may have retried and not have the income they once did.

In both instances, a contract for deed can be a terrific way to buy property. Like any other purchase, the price and terms are negotiable, but the seller acts as the lender, rather than a traditional bank.  Terms of the loan are negotiated between the buyer and seller. Most often, the payments are amortized over 30 years, with a balloon payment (payoff) a pre-determined time in the future; often somewhere between 2 and 5 years down the road.

This payoff is most often achieved by the buyer simply refinancing with a bank or credit union.

Advantages of this arrangement for the seller include an opportunity to strategize and plan for reduced capital gains tax and depreciation recapture, mortgage interest income, ease of foreclosure and sometimes, even a higher sales price.

Advantages to the buyer include a relatively fast closing, a less intensive loan approval process, lower closing costs, and the benefits of property ownership.

A contract for deed is sometimes mistaken for a rent-to-own. In the latter, a tenant lives in the property while often taking steps to repair their credit and obtain a traditional mortgage. Under this arrangement, the tenant may be required to make a nonrefundable deposit, which is nonrefundable but may be applied toward the down payment at the end of the lease term. During the lease, tenants often pay a predetermined amount above and beyond monthly rent, with the excess applied toward their down payment when they buy the property at the end of the lease.

Under a rent to own arrangement, the buyer does not own the duplex. As a result, they do not get the tax benefits of ownership. And in many cases, if the tenant is unable to obtain a mortgage at the end of the lease, not only is the deposit non refundable, so too are the excess monthly payments.

A contract for deed can be a great way to buy and sell a duplex, triplex or fourplex. Call me if you’d like to do either.