Minnesota Contract for Deed

A Minnesota Contract for Deed generally refers to an executory contract for the purchase and sale of Minnesota real estate.

Important note: Significant changes were made to the Minnesota statutes relating to contract for deeds effective August 1, 2024. Such changes are not reflected in this discussion!

Contracts for Deed – Executory Nature

A Minnesota executory contract is a contract which:

has not yet been completed, and
will require some future performance by one or both of the parties.

Contracts for Deed – Financing

A Contract for Deed is a method of financing the purchase and sale of Minnesota real estate by which the purchaser:

promises to pay to the seller the purchase price for the real estate over a specified number of months or years, and
initially receives equitable title to the real property – including the right to possession of the real property.

Upon payment by the purchaser to the seller of the complete purchase price, the seller will be obligated to convey a predetermined form of title to the purchaser pursuant to the delivery of a deed of conveyance.

Minnesota Contracts for Deed – History

Minnesota Contract for Deed financing originated in the late 1800s when farmers were unable to obtain sufficient capital from local banks to purchase farmland.

If a farmer was able to locate a seller willing to take a Contract for Deed in payment, the farmer could purchase Minnesota farmland:

with a small initial down payment, and
pay the balance of the purchase price over a number of months or years pursuant to the terms of the Contract for Deed.

However, it wasn’t long before purchasers of real property located in Minnesota cities discovered that Contract for Deed financing worked just as well for Minnesota residential and commercial property transactions as it did for sales involving farmland.

By skipping the banks and working directly with real estate sellers, such buyers were able to purchase real estate without the loan underwriting and paperwork customarily required by banks.

Contract for Deed financing also required fewer closing costs and financing charges.

Contracts for Deed – Terms

When negotiating the terms of a Contract for Deed, purchasers and sellers are free to determine:

the initial down payment which will be required, if any;
the interest rate which will be charged on the unpaid balance of the purchase price, if any,
the monthly payments which will be required, if any,
the number of months or years the Minnesota Contract for Deed will continue until the remaining balance of the purchase price must be paid in full, and
other terms which may be appropriate for the Minnesota Contract for Deed.

Contracts for Deed – Title Issues

Upon the execution of a Minnesota Contract for Deed by both the purchaser and the seller:

the purchaser will acquire equitable title to the real estate identified in the Minnesota Contract for Deed; and
the seller will retain legal title to the real estate identified in the Minnesota Contract for Deed until the entire purchase price has been paid – at which time the final deed of conveyance must be delivered to the purchaser.

Contracts for Deed – Existing Mortgage

If a seller’s real property is subject to an existing mortgage lien, it is generally not suitable for Contract for Deed financing.

If the purchaser and the seller enter into a Minnesota Contract for Deed transaction in which the real property is subject to an existing mortgage lien, the mortgage lien holder will usually have a right to declare the outstanding balance of the mortgage lien immediately due and payable.

Any such acceleration of the outstanding mortgage lien obligation:

would imperil the purchaser’s equitable title interest in the real estate identified in a Contract for Deed, and
may also imperil the seller’s legal title interest in the real estate identified in the Contract for Deed.

if the mortgage lien was foreclosed upon.

Minnesota Contracts for Deed – Equitable Title

By acquiring equitable title to the real estate identified in a Minnesota Contract for Deed, the Contract for Deed purchaser:

will be considered to be the equitable owner of the real estate, and
will acquire certain rights in the real estate.

Therefore, the purchaser identified in a Contract for Deed:

will not only have contractual rights to purchase the real estate,
but will also acquire certain real property interests from the seller.

Minnesota Contracts for Deed – Specific Performance

Upon full payment of the purchase price, and satisfaction of all other obligations owed to the seller identified in a Minnesota Contract for Deed, the purchaser identified in the Contract for Deed will have a right of specific performance to require the seller to transfer the legal title to the real estate to the purchaser pursuant to a deed of conveyance.

Contracts for Deed – Title Examination

The measure of legal title to be received by the purchaser from the seller will be dependent upon:

the terms of both the purchase agreement and the Minnesota Contract for Deed adopted by the parties, and
the actual liens, encumbrances, and other title matters affecting the real estate.

Therefore, an examination of the status of the real estate title record should be performed by the purchaser’s legal counsel, both:

before the execution of the Contract for Deed, and
before receipt of delivery of the final deed of conveyance from the seller.

Contracts for Deed – Legal Title

By retaining the legal title to the real estate identified in the Minnesota Contract for Deed, the Seller will have the benefit of a security lien against the real estate title until such lien is released to the purchaser upon full payment of the purchase price, and delivery to the purchaser of the deed of conveyance.

Minnesota Contracts for Deed – Recording

It is generally advisable, and it is legally required, for the purchaser to record a Contract for Deed after it has been duly executed by the purchaser and the seller.

Proper recording of a Minnesota Contract for Deed prospectively provides constructive legal notice to all third parties of the interests of the purchaser in the real estate which is the subject of the Minnesota Contract for Deed.

It also notifies the real property tax assessor that a real estate transaction has occurred at a certain price.

Minnesota Contracts for Deed – Default

In the event that the purchaser identified in a Contract for Deed defaults in any of the purchaser’s obligations to the seller identified in a Minnesota Contract for Deed, the seller generally will have the right to terminate the Contract for Deed pursuant to a statutory procedure, which,

if not cured by the purchaser,
will extinguish all of the rights the purchaser had previously acquired in the real estate which is the subject of the Minnesota Contract for Deed.

Minnesota Contracts for Deed – Cancellation

Upon proper service of a Notice of Cancellation of a Minnesota Contract for Deed upon the purchaser in the event of the purchaser’s default in the terms of the Contract for Deed, a purchaser of non-agricultural land will generally only have 60 days in which to:

correct all defaults, and
reinstate the status of the Contract for Deed.

If the purchaser identified in a Contract for Deed has paid a considerable percentage of the purchase price for the real estate at the time of the purchaser’s default on its obligations identified in a Minnesota Contract for Deed, any termination of the Contract for Deed and resulting extinguishment of all of the rights which the purchaser had previously acquired in the real estate may result in:

a significant financial loss to the purchaser, and
possibly a significant windfall to the seller.

Contracts for Deed – Reacquisition of Equitable Title

A seller who successfully terminates the rights of a purchaser in a Contract for Deed:

will not only reacquire equitable title to the real estate,
but will also be entitled to retain all payments which the seller had received from the purchaser prior to the termination of the Contract for Deed.

Contracts for Deed – Deferral of Deed Tax

One of the advantages to the seller with respect to the sale of real estate pursuant to a Contract for Deed is that no Minnesota deed tax need be paid on the transaction until the entire purchase price has been paid to the seller.

Therefore, whatever initial down payment the seller is able to collect from the purchaser need not be diluted by the immediate payment of Minnesota deed tax upon the recording of the Contract for Deed.

Contracts for Deed – Payment of Deed Tax

The payment of the deed tax in a Minnesota Contract for Deed transaction will be deferred until the deed conveying the legal title to the real estate has been delivered to the purchaser.

Contracts for Deed – Purchase Agreement

A sale of real property pursuant to a Contract for Deed may also require the preparation of a Minnesota real estate purchase agreement in order to satisfy certain statutory disclosure requirements imposed upon the seller.

Minnesota Contracts for Deed – Standard Forms

While there are “standard” forms which may be used with respect to any Minnesota Contract for Deed transaction, many real property transactions involve unique circumstances which require careful drafting of the significant terms of the Contract for Deed.

Minnesota Contract for Deed – Customized Forms

The best practice with respect to a Contract for Deed transaction is that upon the closing of the purchase agreement transaction, the purchaser and the seller execute a Contract for Deed form which has been customized for that particular transaction.

For that reason, real estate transactions involving Minnesota Contracts for Deed are best handled by Minnesota attorneys experienced in such matters.

Minnesota Contract for Deed – Real Estate Brokers and Attorneys

Minnesota real estate brokers who are not attorneys are prohibited from providing legal advice to their customers.

Therefore, even if a purchaser or a seller has retained a Minnesota real estate broker to assist in the preparation of a purchase agreement which will culminate in the execution of a Contract for Deed, it is always advisable for the purchaser and seller to each retain their own legal counsel in order to be properly advised with respect to:

the preparation of the purchase agreement, and
the form and content of the Contract for Deed.

Contract for Deed – Modification

Once a Minnesota Contract for Deed has been duly executed by both the purchaser and the seller, changes to the original terms of the Contract for Deed can be documented in a recordable Contract for Deed Modification Agreement.

Such Contract for Deed Modification Agreements can be used in the event that both of the parties desire to modify the terms of a Contract for Deed, such as to:

extend the final payment deadline date,
lower or raise the interest rate,
change the amount of the monthly payments, or
modify any of its other terms.

Contract for Deed – Assignment

Once a Contract for Deed has been duly executed by both the purchaser and the seller, either the purchaser’s interest or the seller’s interest in the Contract for Deed can be subsequently assigned to other parties – absent contractual limitations on such assignment rights.

If limitations on such assignment rights are desired by either a purchaser or a seller, such limitations should be incorporated into the terms of the Contract for Deed.

Transferring or assigning:

a purchaser’s equitable title in real estate,
a seller’s legal title in real estate, or
a seller’s rights to receive the future payments due on a Minnesota Contract for Deed pursuant to an Assignment of Contract for Deed,

are transactions best handled by Minnesota attorneys experienced in such matters.

Minnesota Contract for Deed – Usury

The interest rate which may be charged on a Minnesota Contract for Deed is subject to limitation under the Minnesota usury statute for a contract-for-deed, identified at M.S. Section 47.20, Subd 4a.

The web site operated by the Minnesota Commissioner of Commerce will identify the maximum interest rate which can be charged on a Minnesota Contract for Deed.

Minnesota Contract for Deed – Manufactured Homes

Unless the seller of a Minnesota manufactured home is also selling the real estate lot on which the manufactured home has been permanently affixed, the financing transaction with respect to the sale of a manufactured home is not properly identified as a contract-for-deed transaction.

Rather, the financing of a manufactured home which has not been properly affixed to real property is more properly identified as a promissory note transaction – perhaps combined with a security interest in the manufactured home until the promissory note has been paid in full.

Conclusion – Minnesota Contract for Deed

Both purchasers and sellers contemplating the use of a Minnesota Contract for Deed, and parties contemplating the assignment, cancellation, or modification of an existing Contract for Deed, should retain the services of a Minnesota attorney experienced in such matters.

Gary C. Dahle, Attorney at Law, is licensed to practice law in the State of Minnesota, and in the State of North Dakota, has experience in the creation, execution, assignment, cancellation, and modification of a Contract for Deed.

No claim to original government works.

Gary C. Dahle – Attorney at Law

2704 Mounds View Blvd., Mounds View, MN 55112

Phone: 763-780-8390 Fax: 763-780-1735

Gary@dahlelaw.com

Related topics of interest:

Minnesota Title Evidence of Ownership

Legal Disclaimer

Information provided herein is only for general informational and educational purposes.

The laws relating to Minnesota contract for deeds involve many complex legal issues. If you have a specific legal problem about which you are seeking advice, either consult with your own attorney or retain an attorney of your choice.

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——— Gary C. Dahle Attorney at Law ———