Are you wondering what a contract for deed is? And what are things to consider when buying a house using this type of financing? We’ll cover this and more in our complete guide.
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- When to Use a Contract for Deed
- Common Problems with Them
- How to Create a Contract for Deed
- Contract for Deed Example
A contract for deed is a financing option that involves a buyer entering an agreement with a seller. The Buyer makes payments over a period of time. This pays off the purchase of a home or vehicle. Once the amount is paid in full, the seller transfers the deed or title to the Buyer.
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You may also hear a contract for deed be referred to as a bond for deed, installment land contract, or land contract. In a contract for deed, the seller is considered the vendor, and the Buyer is considered the vendee.
They become responsible for things like insuring and paying taxes on the property, whereas rent to own arrangements treat the Buyer as a renter until the purchase price is paid in full.
Contract for deed arrangements treat the Buyer as the owner unless they stop making payments or break the contract. But there are some things to consider. Read on to learn everything you need to know.
When Is a Contract for Deed Used?
A contract for deed is relatively uncommon compared to more traditional lending and financing options. They are typically used in one of the following scenarios:
- The Buyer has trouble getting approved for other loan options
- The Buyer and seller know each other
- The Buyer wants to pay off the purchase quickly
Other reasons a seller might agree to a contract for deed include keeping ownership of the property until it is paid off in full, reducing the amount of paperwork and red tape, and decreasing the cost of foreclosure and seizure if the buyer defaults.
Sometimes, nonprofit and charitable organizations use this option to help low-income families purchase a home.
Potential Problems with a Contract for Deed
While a contract for deed can be an agreeable arrangement for both buyers and sellers in the right circumstance, there are times when unique problems can arise.
Limited Buyer Protection
One potential problem with a contract for deed is limited buyer rights and legal protections, coupled with their full responsibility for property maintenance, insurance, and payments. Through the course of the contract period, the seller keeps the deed and title.
Those documents are only transferred once the contract’s terms have been met (the full purchase price paid). This can put the Buyer in a uniquely problematic position. Another potential problem is the possibility of the cancellation of the contract if the Buyer fails to make payments as agreed upon.
Contract Can Be Cancelled
With a traditional mortgage, the length of time or number of missed payments may be more flexible. In a contract for deed, the seller determines the length of time payment can be missed or the number of missed payments before they cancel the contract.
This could be as little as one missed payment or a payment that is more than one week late in some states. In terms of contract cancellation, there is the issue of the “equity” the Buyer has been building through the course of the contract by making monthly payments.
Potential to Lose Payments
If the Buyer defaults by not meeting the requirements of the contract and the seller cancels the contract for deed, the Buyer is not returned the amount of money they’ve paid into the property so far. They are not refunded their insurance, property maintenance, or property tax payments.
How to Create a Contract for Deed
You can create your own legally binding contract for deed without help from an attorney. Your contract for deed should contain the following points:
- Buyer and seller names
- Date of contract start
- The overall purchase price
- Any down payment required
- The interest rate
- The total number of monthly installments/end date
- Buyer responsibilities (property taxes, repairs, insurance, etc.)
- Seller responsibilities
- Rules about the transfer of contract
- Legal solutions and process if the buyer defaults
Contract for Deed Example
A contract for deed may look like the example below. Please note that this is for informational purposes only. This is not to be used as a legal document. Please consult an attorney if you don’t fully understand the topic.
Contract for Deed Summary
- A contract for deed is a legally binding agreement signed by a buyer and seller who agree to terms that are drafted by the seller. These terms describe the property, expectations, payment terms, contract period, and legal ramifications if the Buyer defaults on the agreement.
- Contracts for deed are a bit different from rent to own as the Buyer has the same responsibilities as an owner would for the duration of the contract. A renter in a rent-to-own arrangement does not have ownership responsibilities until they own the property.
- There are several benefits to using a contract for deed for both the seller and Buyer. These include things like significantly shortened time to “close,” increased ability to secure housing for low-income or those who have trouble getting approved for a mortgage.
- It also covers less expense and time required of the seller in the case of foreclosure, and the seller’s ability to hold the actual title and deed until the property is paid in full by the Buyer. There are some possible problems with this arrangement, though.
- Those include limited buyer rights, the potential for unfair terms, limited transparency (some contracts for deed are never reported to local or state agencies), and the possibility of losing all equity paid into the property if the Buyer misses one or more payments.
- The contract for deed is seldom used today, but it still accounts for about 5% of the homes purchased in the United States. Some see this option as a great way to enable someone to move quickly into a home or avoid a traditional mortgage.
Some see the contract for deed as an outdated relic that allows sellers to take advantage of buyers who cannot get approved for a mortgage or loan.
What do you think? Would you be willing to use a contract for deed for a purchase as important as a home?