A “contract for deed” is a type of real estate contract where the seller provides the financing for the buyer. There are many different types of real estate contracts, but the most common types are mortgage arrangements and contract for deeds.
Mortgage arrangement - A third party lender, such as a bank or a mortgage company, provides the buyer with financing.
Contract for deed - The seller and buyer agree on a sale price. The seller then provides the loan or financing, and the buyer then repays the loan. The repayment is usually made in installment payments.
Contract for deeds are also called:
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 get a conventional loan through a mortgage company. Laws governing contracts for deeds vary from region to region.
How Do Contracts for Deeds Work?
Buyers - During the payment period, buyers can physically own the property. Buyers may also live on the property or rent it out to another party, if allowed in the contract.
Sellers - Although buyers can physically be on the property, sellers usually retain title to the property. Once buyers complete their payments, they will legally and physically hold the property.
Like any contract, the seller and buyer are free to negotiate the repayment schedule 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 is a balloon payment plan. This type of payment plan is where buyers make periodic installment payments followed by a larger 'balloon" payment. When the “balloon” payment is made, 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 are many benefits and drawbacks for using a contract for deed:
- No third-party “middle man” - The buyer and seller can avoid dealing with a lending company. This can be beneficial to both parties because a lending company may not have the same interests.
- Simpler transaction - Contracts for deeds can be a quicker transaction because buyers do not have to get outside financing. This is useful where a sale needs to occur within a limited time frame.
- Negotiable terms - Banks and mortgage companies usually have fixed terms for repayment plans. Contracts for deeds can allow the private parties to tailor the agreement to their individual needs. The parties can also renegotiate the contract at a later time if necessary.
- Inflated interest rates - Generally speaking, as the buyer pays off more, it is common for the interest level to increase. Toward the end of payments, this interest rate can be much higher than in the beginning. But, the increased inflation will shorten the repayment period
- Recordation - It is common for the parties to fail to record the transfer of the deed with the county recorder’s office. Failing to record will not void the contract, but it can have negative effects in the future
What Happens in the Event of a Default?
Since a land sale agreement is a contract, both parties are bound by law to perform what they agreed on. The buyer must make full payments on time, and the seller is obligated to transfer title at the end of the payments.
If the buyer defaults on a payment, this could cancel the contract. The property will then revert back to the owner.
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 revert back to the seller.
If sellers refuse or fail to convey title to buyers, then they could face liable in a court of law. If the contract requires a transfer of title after payments are completed, then buyers may sue the seller for the transfer. In both cases of default, punitive damages may be awarded if there is evidence of malicious or criminal intent.
Should I Get a Lawyer for My Contract for Deed?
A real estate 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. In the event of a default or a lawsuit, your attorney can help you file a claim in a court of law.