Why Contract for Deed is Good for the Buyer, Bad for the Seller

contract for deedA contract for deed is an agreement for buying property without going to a mortgage lender. The buyer agrees to pay the seller monthly payments, and the deed is turned over to the buyer when all payments have been made. It is simpler and cheaper than getting a mortgage yourself, but it isn’t risk free.

Benefits for Buyers

If you are unable to qualify for a mortgage because of a past bankruptcy or lack of employment history, a contract for deed could be the right solution for you. If the seller is willing to do business with you that is really all you need. You will possibly have more freedom for negotiating a down payment and you won’t have to pay any closing costs, origination fees, or other fees that are involved with taking out a mortgage. With a traditional mortgage, if you default, the lender could demand you pay off the entire loan even if you make up all of the missed payments. A seller using a contract for deed doesn’t have that option, unless you agree to include that clause in your contract. Other benefits include: no loan qualifying, low or flexible down payment, favorable interest rates and flexible terms, and a quicker settlement.

Risks for Buyers

The biggest risk when buying a home contract for deed is that you really don’t have a legal claim to the property until you have paid off the entire purchase price. This means that if you default and can’t make your payments, you lose the property and all of the money you have already paid into it (often including repairs and improvements). Unlike a traditional mortgage, a defaulting buyer in a contact for deed may only have 30-60 days to cure the default or move out. Another major risk is that the seller can still encumber the property with liens and mortgages as they are not required to transfer good clean title until the completion of all payments under the contract. In addition there are also very limited disclosure/inspection rules which means that a buyer who doesn’t perform a thorough inspection of the home could end up with a home that has significant defects which require substantial repairs.

Benefits for Sellers

A contract for deed offers you a way to do business with a buyer who can’t qualify for a regular mortgage. The process is usually faster than a regular mortgage sale. If the buyer goes into default, you can terminate the contract right away without having to go through all of the legal procedures that are required for a mortgage holder to foreclose on a home. Other advantages include: no appraisal required, wider range of buyers, possible profit on financing, and quicker settlement.

Risks for Sellers

The biggest disadvantage of a contract for deed for a seller is that the property won’t be out of your name for many years. This quite possibly won’t suit your investment strategy. You will also be waiting until the contract is fulfilled to receive all of your money, instead of having an immediate payment of the total purchase price from a traditional mortgage company. Other risks include: the loan stays on your credit report, the seller is still liable for the loan, risk of non-payment by the buyer, and the buyer never goes through a formal application process like with a regular mortgage. In addition, the seller is still the legal title holder and if the buyer fails to keep the property up to code and ordinance requirements, the seller could be subject to fines, lawsuits and other legal problems as a result of same.

Flexibility for Both

The terms of a contract for deed are flexible, depending on what each party works out between them. The length of the contract and the amount of monthly payments are up to the buyer and the seller to agree upon. Depending on the exact terms, this flexibility could be a pro or a con.

 If you are the buyer or the seller of a home, and you chose to use contract for deed financing, you need to enlist the services of a qualified real estate attorney. At Sherer Law Offices, our attorneys will draft the appropriate disclosures and indemnities to protect all parties involved

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What Is the Difference Between Joint Tenants and Tenants in Common?

Difference-Between-Joint-Tenants-Tenancy-In-CommonWhen two or more people share ownership of land or other real estate, each person owns an interest in the property. For this reason, Illinois law requires that co-owners of property make a decision about how the title of the property is held. In Illinois, a title can be held in three ways: tenancy by the entirety, tenants in common, or joint tenants with the right of survivorship. The type of title assigned to a property will define the rights and authorities of outside creditors, and it will also affect how the property is transferred upon the death of an owner.

Tenancy by the Entirety

Tenancy by the entirety in Illinois is a means of holding title that is exclusively available to married couples. One of the benefits of this type of title is that it affords extra protection to marital property against some creditors.   For example, the property under this title may not be divided, sold, or otherwise encumbered for any non-joint debts of a husband and wife without the consent of both spouses.

While there are benefits to holding title as tenants by the entirety, the guidance of an experienced attorney who concentrates in real estate and contract law is recommended to establish this form of title.

**Important: Illinois law does NOT offer an automatic tenancy by the entirety provision for married couples that share a home as joint tenants. Instead, the courts require that specific terminology be employed in the deed to create this form of tenancy.

The two more common forms of holding title are as tenants in common or as joint tenants. Here are a few important differences to remember between the two.

Tenants in Common

A title held as tenants in common is the most basic form of title. In Illinois, this form of title is considered to be the default if no other specifications of ownership are defined.

Tenants in common usually have different interests in ownership of the property. For example, Bob and Stan may own 25% each, while Steve owns 50%. Tenants in common may also acquire ownership at different times. However, these “fractional interests” do not mean that any one owner is entitled to use the property more than the others. The equal use of the property is known as unity of possession.

Tenants in common each hold independent ownership interests. This means that each owner’s share of the property may be sold, conveyed or transferred without prior permission from the other owners. Creditors may also come after one owner’s share of property for debts owed.

There is no “right of survivorship” for tenants in common. If one owner dies, his or her share of the property will be transferred according to that owner’s will or by the intestacy statute. Without a will, the owner’s heirs or beneficiaries will become the new owners of that share.

Joint Tenants

Joint tenants are different from tenants in common in the fact that they acquire equal shares of the property on the same property deed at the same time. The terms of joint tenants are stated specifically in the deed to the property.

A joint tenant agreement can be broken if one tenant sells his or her interest to someone else. This will change the ownership to tenants in common for all parties involved. Keep in mind that a tenancy in common agreement can be broken if one or more of the tenants buys out the other tenants, or if a partition action is filed with the court. A partition action allows an heir to sell his or her share.

Joint tenancy is the title that is usually held between spouses and other family members. It allows for the property to pass to the survivors of that person without having to go through probate court, saving both money and time.

Survivorship Rights

One of the biggest differences between these two tenancies is what can happen to the property when one of the owners passes away. With a joint tenancy agreement, the interest belonging to the owner that passed away usually gets transferred to the surviving owner. For instance, if three people own the house jointly, the share of the person that passed away is divided equally among the surviving tenants. That is the right of survivorship.

Things to Keep in Mind

Married couples should carefully review their title when buying a home if they want the right of survivorship to be included. If a tenant in common passes away, their entire estate, including their share of the house, must be divided according to probate court rules.

Despite the benefits of joint tenancy, there are financial aspects you need to consider. In a joint tenancy, if one of the tenants owes money, creditors are able to attach the interest of the debtor to the property and force a foreclosure. They could do this even if the other tenant had nothing to do with the debt in question.

For any real estate transaction or questions about a deed, we highly recommend that you seek the guidance of an experienced real estate attorney.

CONTACT the Law Offices of Barbara Sherer to schedule a consultation.

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