A "contract for deed" is a legal term referring to a real estate transaction occurring directly between a buyer and a seller/investor, excluding the involvement of a lender. This arrangement is also known as an installment purchase contract, installment land contract, or bond for deed.
In a contract for deed transaction, the property is transferred from the seller to the buyer without the intervention of a third-party lender, such as a bank. Instead, the buyer makes direct payments to the seller/investor.
Before the property changes hands, both parties agree in advance on various terms, including the purchase price, down payment, interest rate, monthly payment amounts, and the timeframe for completing the purchase. Although the buyer takes possession of the property upon agreement, the seller retains the title until the final payment is made, and the sale is fully executed.
This type of sale offers flexibility, allowing parties to customize transaction terms to suit specific situations. A contract for deed may be suitable under the following circumstances:
To avoid traditional financing: It is appealing for buyers who cannot secure a traditional mortgage due to reasons such as poor credit, insufficient down payment, or other factors. In such cases, the seller might agree to a higher interest rate than a lender would require.
To save on fees: Contract for deed sales can be less costly than conventionally financed ones, sidestepping many associated fees and potentially reducing closing costs, especially without a real estate agent involved.
To expedite the home sale process: Unlike conventional transactions that may take a considerable amount of time, contracts for deed can be executed swiftly, requiring only an agreed-upon deal between the buyer and seller. However, filing the contract with the county's registrar of titles is crucial.
When parties know each other well: It is often used for property transfers within a family or between close friends who trust each other enough to bypass involving a bank.
However, there are drawbacks to a contract for deed:
Lack of regulations: As an unconventional transaction, contract for deed arrangements have fewer regulations governing them, potentially leading to issues related to home appraisals and inspections.
Legal claim and missed payments: The buyer may move in, but they lack a legal claim to the property until the sale is fully executed. Missing payments may result in difficulties, and unlike a conventional mortgage, there is no obligation for the seller to pursue foreclosure through legal channels.
Balloon payments: Contract for deed sales may include a balloon payment, usually toward the end of the payment schedule. Buyers need to be prepared for this substantial increase to avoid challenges in meeting payment obligations.
In summary, a contract for deed is not complete until payment terms are fully met, and it serves as a legally binding agreement outlining the roadmap for the sale between the buyer and seller.
