When people are considering purchasing a home, they will traditionally work with banks or other lending institutions to obtain a mortgage loan. Potential buyers can skip this option by entering into a legal agreement with the seller, whereby the seller provides the financing directly to the buyer.
This contract for deed allows the buyer to make monthly installment payments to the seller, who retains the title to the property until the purchase price is satisfied. A contract for deed is also called an installment agreement, land contract or owner/seller financing contract.
If a seller is particularly motivated, they may be willing to enter into a contract for deed with the buyer if the buyer doesn’t have enough time to get traditional third-party financing. The terms of a contract for deed will vary according to state law and what the parties are comfortable agreeing.
For instance, the seller can agree to allow the buyer to take possession of the property immediately while retaining title to the property. The seller essentially has a paying tenant on the property, which is a good option for sellers who are unable to sell their property immediately and want to be able to continue to make their mortgage payments.
There are some obvious benefits for entering into a contract for deed from the buyer’s standpoint:
- Traditional Financing Impractical: Sometimes a buyer is reluctant to deal with a lending company or is unable to obtain a traditional mortgage. This may be because the lending company’s interest rate or the required down payment is too high;
- Accelerated “Closing”: Traditional financing arrangements can take time to be approved by a bank. If the buyer is in a hurry to take possession of the property, a contract for deed can speed things up; and
- Negotiable terms: If a buyer has poor credit history or insufficient down payment, a contract for deed might be the way to go. A buyer can negotiate with the seller for terms that better fit their situation than they might with a bank.
- For example, a bank may require a greater down payment or higher monthly payments than the buyer can produce initially.
- lso, where defaulting on a mortgage payment may entitle the lender to demand repayment of the loan in full, the buyer can negotiate with the owner to avoid this penalty.
A contract for deed is not without its disadvantages. Disadvantages may include:
- Higher Payments: One reason a buyer might avoid a traditional third-party lender is to avoid a higher down payment.
- However, an owner can still require a high down payment from the buyer to protect the owner’s interest in the event the buyer defaults.
- Also, because the contract for deed will allow the buyer to avoid the third-party lender, the seller may demand a higher purchase price for the property.
- Deed Transfer: The end result of the real estate transaction is that the buyer gets the deed to the house. Unfortunately, in most cases, the owner holds onto the deed until the payments are all made.
- Negotiable Terms: While the buyer can negotiate directly with the owner for terms that are more favorable, the seller holds most of the cards. Ultimately, it is the seller who will determine by what terms it is willing to sell the property. This is especially true if the seller is not financially dependent on income from the property.
A contract for deed works the same as any other contract. The parties have respective obligations and responsibilities as outlined in the contract. The buyer needs to make payments in a timely manner, and the seller needs to transfer title to the property as indicated.
If they fail to satisfy the terms of the contract, the defaulting party has the right to seek whatever damages are allowed under the contract or under the law.
Typically, the seller will negotiate for the property to revert back to the seller if the buyer defaults. The buyer can also sue the seller for breach of contract if the seller refuses or fails to transfer title to the buyer when the terms of the contract have been satisfied.
The contract may include other negotiated penalties. For example, the buyer may negotiate to have some of the initial payments returned if the seller breaches the contract. The seller may negotiate to keep the buyer’s down payment as a penalty for the buyer’s failure to fulfill their obligations under the contract.
Dealing with a contract for deed can present various challenges and legal issues. A real estate lawyer will be able to explain to you more about what a contract for deed is and what your state permits. Also, your attorney can help you negotiate the most advantageous terms for you if you do decide to enter into a contract for deed.