|
|
Education for Justice |
FACT SHEET H-20 |
Fall 2011 |
“RENTING TO OWN” A HOME
OR
BUYING ON A CONTRACT FOR DEED
BE CAREFUL! Buying a house is complicated. Many people get into trouble when they rent a
house with an option to buy it, or when they buy it under a contract for deed.
THE DIFFERENCE BETWEEN “RENTING TO
OWN” AND A CONTRACT FOR DEED
“Renting to own” usually means renting with an option to
buy. Under this kind of agreement, you
are still a tenant, and the seller is still a landlord, until the final
purchase. A contract for deed is very
different. As soon as you sign the
contract, you are responsible for repair and maintenance, and usually for the
taxes and insurance.
TIPS ON RENTING TO OWN
·
Get the agreement in writing! Don’t agree to anything that is not written
down. The law will not enforce
agreements to buy a house unless they are in writing!
·
Make sure the agreement says what part of your payments are rent and what part go toward the
purchase.
·
Make sure the agreement says when the actual
sale will be, and what the terms will be.
It should say if the sale will be by a contract for deed, or if you need
to get a mortgage. If you need a
mortgage, talk to a bank to see if you qualify for one before you sign the
agreement.
·
Make sure the seller really owns the home. Go to your county recorder’s office and ask
for help to find out who owns the home.
·
Many rent-to-own agreements say that you have to
make a down payment when you sign. You
may not get the down payment back if you do not buy the home. Read the agreement carefully.
·
Watch out for scams. Some landlords do not really want to sell the
home. They use rent to own agreements to
get more money from tenants or to get tenants to do work on the home. Make sure you read the agreement carefully
before you sign.
WHAT IS A CONTRACT FOR DEED?
·
A contract for deed means that instead of paying
the seller all at once, you buy the house over a period of time, like 5
years. Usually, you make monthly
payments for a few years, and then you have to make a big “balloon payment” to
finish buying the house. To make a
balloon payment, you usually need to get a mortgage from a bank. If your contract for deed has a balloon
payment, make sure you will be able to get a mortgage. Otherwise, you will lose the house and all
the money you have paid!
·
·
If you don’t make all of your payments, you will
lose the house. The payments you have
made will be wasted. You will also lose
the value of any improvements you made to the home. If you do not make your payments, a contract
for deed can be canceled in 60 days, much faster than a mortgage. Once the contract is cancelled, you can be
evicted. You won’t have much time to
make up for missed payments.
GET AN INSPECTION REPORT BEFORE
SIGNING AN AGREEMENT
Before signing any agreement to buy, ask the seller for an
inspection report, sometimes called a “Truth in Sale of Housing Report.” This report is from an independent inspector
about the condition of the house. It is
required in
CONSIDER GETTING AN APPRAISAL BEFORE
SIGNING AN AGREEMENT
If the purchase price on the contract is too high, you may
not be able to get a mortgage to pay it.
An independent appraiser can help you learn the value of the home. If you do not want to pay for an appraisal,
do your own research. Sources like www.zillow.com can help you get a good idea of
how much the house is worth.
MAKE SURE THE SELLER IS ACTING LEGALLY
WHILE YOU PAY
·
Make sure
the person you are buying from owns the home.
Go to your county recorder’s
office and ask for help to learn who owns your home. Make sure the home is not in
foreclosure. After you and the seller
have signed the contract for deed in
front of a notary, the seller must give you a copy of it with original
signatures.
IT IS VERY IMPORTANT that you record the contract for deed at the
county recorder’s office so others will know you have an interest in the
property.
The county recorder’s office may
not allow you to record the contract for deed until past due taxes are
paid. Usually the seller must pay any past
due taxes that are required to be paid prior to recording. Before you sign, check with your county’s
property tax department to make sure there are no past due taxes.
·
If the
seller has to pay a mortgage on the property, or taxes, or insurance, you
should check on it now and then to make sure they are paying.
Some “scam” sellers will keep a
buyer’s payments and not pay the mortgage.
If the seller does not pay the mortgage and the home is foreclosed, you
will lose the house and all the money you paid.
Check the county recorder’s office
for information on the mortgage company or companies. Get written authorization from the seller to
contact the mortgage company. Find out
from the mortgage company if the payments are up to date. Find out how much the seller owes to the
mortgage company. If the seller owes
more than the purchase price on the contract for deed, you may not be able to
buy the house.
·
If you
default, make sure the seller follows state law.
The seller must serve you
with a notice of cancellation of your contract for deed. If you get this notice, you have the right to
pay the amount of money needed to catch up, plus some additional costs. The notice should list the additional costs
for you. If you get the notice, you can’t
be sued by the seller for any payments you have missed. If you do not get a notice and the seller
tries to evict you, call a lawyer right away.
PLAN ON THE ADDED COST OF OWNING
·
If you sign a contract for deed, you have to
repair and maintain the home. To protect
yourself, know the condition of the home you buy. Otherwise it may cost you a lot of money to
keep it up.
For example, you can be tagged by
the housing inspector if your house needs to be painted or other repairs are
needed. If the furnace breaks, you have
to fix it. If you don’t make the
repairs, the house could be condemned and you would have to move out.
·
Find out about the property taxes. Homes are taxed as homestead or rentals. Rental property tax costs more. If the property was not homesteaded and you
move in after June 1, you’ll pay taxes at the higher, non-homestead rate for
the rest of that year. You may apply for
a homestead tax rate at your county’s property tax department.
Make sure the contract for deed
states whether property taxes and hazard insurance are included in your monthly
payments or whether you need to pay them in addition to your monthly payments.
UNDERSTAND THE INTEREST COSTS
Your payments on the
contract for deed will also include interest.
For example, if you buy a $100,000 home with no down payment
and a 10% interest rate on the contract for deed, you will pay about $10,000 in
interest during the first year. So if
you pay $1,000 a month, at the end of the first year you will have paid only
$2,000 of the house price and $10,000 in interest. You will still owe about $98,000 on the house
after paying $12,000.
Some contracts for deed have interest-only payments. This means that none of your payment goes
toward the house price. When your
balloon payment is due, you will still owe the whole cost of the home. Before you sign a contract for deed, call up
some banks to compare the interest rate the seller offers you with the interest
rate on a mortgage. If you can get a mortgage loan, it is usually better to buy
your house with a mortgage than on a contract for deed.
To find other Legal
Aid Society materials, including the fact sheets mentioned in this
document, go to www.lawhelpmn.org/LASMfactsheets.
|
Minneapolis Legal Aid – CLE MN
Legal Services Coalition |
Don’t use this fact sheet if it is more than
1 year old. Write
us for updates, a fact sheet list, or alternate formats. Fact
Sheets aren’t a complete answer to a legal problem. See a lawyer for
advice. |
|
© 2011 Mid-Minnesota Legal Assistance. This document may be reproduced and
used for non-commercial personal and educational purposes
only. All other rights reserved. This notice must remain on all
copies. Reproduction, distribution,
and use for commercial purposes are strictly prohibited. |
|