Saturday, November 17, 2012

Beware of 'contract for deed' housing schemes, Mpls. officials warn | Minnesota Public Radio News

MINNEAPOLIS — Minneapolis officials and housing advocates are concerned about a trend in the housing market.
They say more property owners are striking up informal "contract for deed" deals as a way to sell homes to people who don't qualify for loans.
Really?  Now people who are given the option to buy a home with poor credit or little money down are now victims?  What does the contract for deed have to due with regulation.  If someone buys a home and they become the owner, that means they get to take care of it and pay for the upkeep.  This is how the Contract for Deed works in MN.  You do not get title to the property until  you pay off the note but you become the owner of record.  It is the same as if you get a loan from the bank for your car.  The bank will hold the title until you pay off the note.  The you will get the note in the mail.  Also in MN when you buy a home you get possession of the title while the bank places a lien on the property.  Often the title can be stored with a title company or you can keep it in your own safe place.  MN is a not a trust deed state.  
Some of these sellers are landlords the city says are using the arrangement to skirt safety and housing laws.
North Minneapolis resident George Williams, 48, bought his house through a contract for deed last year and said it was the best deal he could find given his shaky credit. He isn't able to get a mortgage.
"I don't qualify for it right now and I've been talk to the banks to see I even ran a check online to see if I qualify for it but I don't have any extra income coming in," Williams said.
In a contract for deed, the seller provides financing for the buyer, who makes monthly payments to the seller. Advocates say some contracts for deed, especially those provided by non-profit housing organizations, are fair.
But unlike a traditional mortgage, contracts for deed are usually just a few years long — typically three to five years. So most buyers have to refinance in order to make a balloon payment, complete the deal and get the deed to the house. But refinancing is often difficult because properties sold this way are often not appraised, so buyers may be agreeing to pay more than a home is worth. Williams is hoping to get a mortgage in time to pay his $58,000 balloon payment in three years.
"My main concern is to make sure that I am able to go to a bank and refinance on this house," Williams said.
One more way for the city to get in the way of the housing market.  The mission for years in Minneapolis and St. Paul Minnesota has seemed to be systemically remove landlords by making the costs so onerous that it no longer becomes profitable to own a rental home.  I bought my first house ever on a contract for deed in Minnesota and it was a way for me to get a home while starting out in a commission job.  I had not worked long enough to qualify for a bank mortgage. 

If the buyer of the property gets their credit in order over the course of a couple of years and the property is of reasonable value they should be able to get some type of mortgage to pay of the contract for deed.  Also the buyer can possible work a deal with the seller to push out the balloon payment if they need more time.  

Of course there are risks associated buying a home on a contract for deed but there are risks when getting a loan from the bank.  When someone it unable to qualify for a loan with a bank, the contract for deed a reasonable option.  It also is a way to promote home ownership and owner occupied home ownership.  This is helping the city accomplish its mission of reducing the number of landlords and increasing the number of owner occupied homes in the lower priced neighborhoods. 
Williams bought his home through north Minneapolis real estate broker Howie Gangestad. The broker said contracts for deed are a good way for people like Williams, who have bad credit or low incomes, to buy homes.
"There is a lot of underground society in north Minneapolis," Gangestad said. "They don't have enough income to qualify or low credit scores due to their own fault or through no fault of their own."
Gangestad charges higher interest rates than a bank. In most cases, he said that's because buyers put little to no money down. He said nobody who could get a lower interest loan would ever buy from him. "It's not a good deal for them if they can get a regular mortgage at the bank," he said. "I would never sell on a contract for deed if they qualify."
Read the full story: 
Beware of 'contract for deed' housing schemes, Mpls. officials warn | Minnesota Public Radio News

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