A 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