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What is a Contract for Deed?

A “Contract for Deed” is a type of real estate contract wherein the seller provides the financing for the buyer.  This is different from a mortgage arrangement, where a third party lender such as a bank or a mortgage company provides the buyer with financing.  In a contract for deed, the seller and buyer agree upon a purchase price, the seller provides the loan or financing, and the buyer then repays the loan, usually in installment payments. 

Contracts for deeds are also called “installment sale agreements”, “land contracts”, or “owner financing”.  They are commonly used as a form of short-term financing.  This is usually the case where the seller is eager to sell but the buyer does not have enough time to obtain a conventional loan through a mortgage company.  Laws governing contracts for deeds vary from region to region. 

How do Contracts for Deeds work?

During the payment periods, the buyer is allowed to assume physical possession of the property and may live there or subsequently rent it out to another party if this is allowed.  However, the seller usually retains title to the property until the payments are completed.

Like any contract, the seller and buyer are free to negotiate the repayment provisions as they see fit.  The terms for repaying the seller’s loan can exist in all different kinds of arrangements.  The most common form of repayment plan is a balloon payment, where the buyer makes periodic installment payments.  At the end of the payments a larger “balloon” payment and the transfer of deed is finalized.  This arrangement allows for a shorter time frame for the payments to be made.

What are the Advantages and Disadvantages of a Contract for Deed?

There many benefits and drawbacks to using a contract for deed:



What happens in the event of a Default?

Since a land sale agreement is a contract, both parties are bound by law to perform their parts of the bargain.  The buyer must make full payments in a timely manner, and the seller is obliged to transfer title at the end of the payments.

If the buyer defaults on a payment, this could result in the contract being cancelled.  What then happens is that the property will revert back to the owner.  Furthermore, the buyer must reimburse the seller for the missed payments, and the buyer will keep any monies obtained from previous payments. 

In a mortgage arrangement, the mortgage company can place a lien on the property if the buyer misses a payment.  This is different in a contract for deed, since the seller still retains title to the property during payments; as a result, the property will simply revert back to the seller.

Now if the seller refuses to convey title to the buyer, they could be held liable in a court of law.  If the contract specified a transfer of title upon completion of the payments, the buyer may sue the seller in order to compel them to transfer the title.  In both cases of default, punitive damages can sometimes be awarded if there is evidence of malicious or criminal intent. 

Do I Need a Lawyer for a Contract for Deed?

An experienced lawyer will be able to tell you whether a contract for deed is right for you.  If you do decide to enter into an agreement, it is highly advisable to have a lawyer draft and review your contract for deed.  This will ensure that the agreement is finalized in a way serves the interests of both parties while conforming to the laws of your state.  Finally, in the event of a default or a lawsuit, an attorney can assist with filing your claim in a court of law.

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Last Modified: 01-08-2013 03:23 PM PST

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