Contract for Deed

Answer 1

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A Contract for Deed is commonly used by a Seller of property who is interested in acting as a lender to the purchaser of their property. Through a Contract for Deed, the Seller also acts as the financer for the Buyer. This option has pros and cons for both Buyer and Seller.

The Seller does not receive the total sales price for the property at the time of executing the Contract, but rather receives payments pursuant to the terms of the Contract. The Seller does retain ownership of the property until the Contract terms are met. Since the Seller receives periodic payments, the Seller can view these payments as steady income. Since the Seller is the financer, the Seller receives the total purchase price plus accruing interest as set forth in the Contract. The Seller takes on certain risks should the Buyer default on payments making it necessary to pursue foreclosure proceedings.

A Contract for Deed assists a new homebuyer with no credit history or poor credit history in obtaining financing to purchase a home. By not using the traditional financing method of a bank or credit union, the Buyer can build credit by financing through a Contract for Deed. The Buyer must be cautious when entering into a Contract for Deed to ensure that the Seller is the actual owner of the property and has authority to sell the property. The Buyer can contact the County Recorder for the county the property is located in to check the property records.

Answer 2

A contract for deed is a real estate transaction in which the seller retains title to the property and finances the sale with the buyer. A contract for deed is also referred to as an installment sales contract. The popularity of a contract for deed transactions rises and falls, depending on the availability of mortgage lending.

In a contract for deed, the buyer does not obtain a mortgage. The seller agrees to take a down payment and monthly payments made directly to the seller. The seller will hold the deed to the property in escrow. Normally, an interest rate is charged on the outstanding balance of the contract, much like a lender charges mortgage interest.

The buyer will usually obtain possession to the property when the contract is signed, but not title to the property. If the buyer defaults on the contract, the seller merely cancels the contract and retakes possession. The buyer will normally forfeit the down payment and any payments made will be treated as rent. In some states, if the buyer has paid a substantial portion of the contract, courts may treat the contract as a mortgage, and the buyer may receive a portion of the equity back.

Taxes, insurance and maintenance are usually treated as if the buyer had obtained a mortgage and was the owner of the property. Yearly taxes are usually the responsibility of the buyer. Prudent sellers will require the buyer to obtain fire and casualty insurance, and will often require the buyer to name the seller as a payee. Repairs and maintenance are also usually the responsibility of the buyer. Sometimes, a seller will require permission if the buyer intends on making improvements to the property, especially if the buyer is retaining contractors.

A buyer will normally need the seller's permission to resell the property. However, if the buyer obtains a sufficient sales price to pay off the remainder of the contract, the buyer can simply pay off the contract and then immediately sell the property to the subsequent buyer.

A contract for deed may or may not have a balloon payment. Balloon payments are more commonly seen on shorter term contracts. After a number of years of monthly payments, 5 years, for example, the buyer must pay off the remainder of the contract. The final payment is known as the balloon payment.

For example, A sells a property to B for $150,000, with $10,000 down and payments of $800.00 per month for 5 years, accruing interest at 5%. At the end of 5 years, the remaining balance must be paid in full. If payments are timely made, there will be a remaining balance of $125,265.00. The buyer must pay off the $125,265.00 as a balloon payment to complete the contract.

A contract for deed can be beneficial to both parties, but is more risky than a mortgage. The seller, by providing his own financing, obtains interest from the buyer. If the seller has an existing mortgage, the lender might call the loan due, if the mortgage permits it. The buyer takes the risk that payments will be made. If a default occurs, the buyer may lose everything invested in the property.

Answer 3

A contract for deed is a real estate transaction where the seller finances the purchase for the buyer. The buyer makes regular payments to the seller over time, and once the full amount is paid, ownership of the property is transferred to the buyer. It is also known as a land contract or installment contract.