Contracts for deed, also known as land contracts, are a form of seller financing for the purchase of real estate, both residential and commercial. A contract for deed is often referred to as a mortgage substitute. It is a financing device used when the purchaser is unable to procure typical mortgage financing. “The contract for deed is a form of financing in which the real estate purchaser, instead of paying the purchase price with a mortgage loan from a third party, purchases the property by, in effect, borrowing from the seller.” The seller retains the fee interest in the property as security for the debt, and the purchaser is considered the equitable owner of the property.
Contract for deed developed in Minnesota in the nineteenth century when farmers were unable to procure loans for anywhere near the amounts needed to finance their acquisition of farms. Contracts for deed with small down payments allowed farmers with little cash to acquire property. Contracts for deed were also attractive to sellers because, if the purchaser defaulted, the seller could terminate the contract and regain their property far quicker they could with a mortgage foreclosure, which involved a lengthy and expensive publication, sale, and statutory redemption period. Thus, contract for deed facilitated the free alienability of real property. Because of these attributes, contracts for deed became commonly used for the sale of residential and commercial property, particularly when mortgages were not being made or had high interest rates.
Unlike many other states, Minnesota has a thriving contract for deed practice and specialized laws regulating the rights of the parties and enforcement of contracts for deed. Minnesota and its neighboring state of Iowa are the only states in the nation that provide a statutory, nonjudicial, highly expedited form of seller cancellation of the contract for deed without the necessity of conducting a sale. In many other states, to effectuate a termination of a contract for deed, a seller must incur the time, expense, and complexity of either litigating or foreclosing the contract like they would foreclose a mortgage—holding a public sale and waiting out a lengthy redemption period. In contrast, in Minnesota, when a contract purchaser fails to make payments or otherwise defaults under a contract for deed, the contract seller has the remedy of statutory, nonjudicial cancellation by written notice. This remedy has a tight period to cure—generally sixty days in Minnesota and only thirty days in Iowa. In the event that the purchaser fails to cure defaults, the contract is terminated. The purchaser loses all interest in the property and all monies paid without any requirement of a sale of the purchaser’s interest or a redemption period and without the seller having to pursue judicial termination. The simplicity and finality of Minnesota’s statutory cancellation of contracts for deed, “one of the harshest forfeitures known to American law,” provide the foundation for the vitality of contracts for deed in Minnesota.
In contrast to the typical mortgage transaction, the most common case involving residential contracts for deed is that of a person who owned and occupied the property for a significant period selling and financing to another person who will similarly own and occupy the property. These types of transactions are sometimes called folks selling (and lending) to folks or mom ’n’ pop sales because they involve virtually interchangeable parties with relatively equal experience, sophistication, and bargaining power compared to transactions involving institutional lenders. The typical case of folks selling to folks likely informs the willingness of the Minnesota legislature and the courts to accept the harshness of statutory cancellation.
However, many contract-for-deed sales of residential property are not in fact folks selling to folks with equal bargaining power. A series of news articles revealed abuses by contract-for-deed sellers, particularly against Minnesota’s Somali communities, and highlighted the need to reform Minnesota’s contract-for-deed law. In response, a bill was introduced into the Minnesota legislature proposing significant changes to the law. The new Minnesota contract-for-deed legislation, enacted May 24, 2024, and effective August 1, 2024, constitutes the most significant amendment to Minnesota’s contract-for-deed law in almost forty years.