Contract for Deeds: How Long is Too Long?
Tuesday, July 5, 2011 at 10:03AM July 5, 2011
By: Stephen J. Nash
Nash Law Firm
nash@nash-law.com
One of the key terms of any contract for deed is how long it will last. In most cases, Sellers want a shorter period of time (3 to 5 years) while buyers want a longer period of time. Because Sellers generally have more leverage, the typical contract for deed will have a term of 3 to 5 years.
People often get confused between the amortization rate and the length of the contract itself. The amortization rate is the length of time that it would take to fully payoff the contract for deed at the agreed upon monthly payment amount. The longer the amortization period, the lower the monthly payment. The contract for deed term often is shorter than the amortization period of time.
It is quite common to see the contract payments amortized over a 30 year period of time but the contract for deed is due in 3 to 5 years. A payoff date that is sooner than the end of the amortization period is called a balloon payment.
A Buyer can try to induce the Seller into agreeing to pay periodic "mini" balloon payments before the final balloon payment is due. The mini balloon payment does not fully payoff the contract but the Buyer essentially pays off more of the principal owed on the Contract which provides the Seller with more security.
A Buyer can also offer a greater down payment to induce the Seller to agree to a longer contract term. The more money invested by the Buyer, the more secure the Seller is that the Buyer will not default.
Another inducement to a longer contract term is for the buyer to agree to a short amortization rate. This increases the monthly payment and increases the amount of principle being paid with each payment.
Sellers also have to be realistic about the Buyers ability to pay off the contract by the agreed upon final balloon date. If the period of time is too short, the Buyer will not be able to perform and the Seller will be faced with having to cancel the contract and start all over or agree to voluntarily extend the length of the contract.
Some sellers do not need nor want for the contract to be paid off. They want a long term cash flow at an attractive interest rate. While the longer term generally is welcomed by the Buyer, the trade off is that the Seller normally will require that the contract contains a clause prohibiting an early paying off the contract for deed for a period of time.
Conclusion
While most contracts have a 30 year amortization with a final balloon payment in 3 to 5 years, Sellers and Buyers can adjust the amortization rate and/or the length of the contract to try to meet the needs of the Seller and Buyer.
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NOTICE The foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly applicable principles, under Minnesota law, relevant to a typical situation. Each set of facts and each contract is, or can be unique; the unique facts and specific language of the contract may require a different legal analysis and may result in a different outcome. Before proceeding in reliance upon this or any other general description of law, consult with an attorney competent in the field of practice relevant to your situation. Copyright 2011 Nash Law Firm |