What Is A Contract For Deed?
Using a Contract for Deed, a buyer who desires faster financing or doesn’t qualify for traditional mortgage choices will be able to purchase a property.
Related: Buying a house? Prepare yourself by reading our guide on how to buy a house.
Abiding by a Contract for Deed, the buyer pays the seller back in full through regular payments, bypassing traditional bank financing. If they’re unable to do this, the buyer can use other means as long as they fully compensate the seller. Until the balance is paid, the seller holds legal title to the property, with the title transferring to the buyer once they’ve completed the payment process.
Not all regions are the same. In some states, a buyer is reimbursed for the fair value of improvements made to the property. This reimbursement is made by the seller if they repossessed the property. This is also done if the seller has the obligation to pay back an agreeable amount for rent.
However, due to abuse of these contracts in the past, precautionary laws have been created. Now sellers of 1-4 unit residential properties must meet certain requirements should they enter contracts 4 or more times during a 12 month period. In Illinois, the requirements are as follows:
The Contract For Deed Requirements
- Permanent index number (PIN)
- Legal description of the property
- Amount to be paid monthly
- Late payment costs and their grace period
- The buyer’s name
- The seller’s name
- Annual interest rate
- Downpayment and the principle left on the loan
- Total of the property and insurance taxes of the first year.
- Duration of the loan written in years and months
- Is a “balloon payment” lump sum due as final payment?
- The previous year’s fair cash value
- The previous year’s assessed value
- Who is going to pay for the insurance and real estate taxes
- How often are those insurance and real estates to be paid?
- Recording that insurance and tax fees may differ each year
- Provide the amount for the previous year’s real estate taxes
- The remaining value of unpaid property taxes
- A document displaying when the buyer will be transferred title
- Previous year’s insurance payment
- The seller’s’ interest in selling the property
- The type of insurance coverage to be provided
- Are there any mortgages or liens restraining the property?
- Provide the amortization schedule
- The dates additional charges or fees are due
- Determine who is responsible for the cost of repairs
- State when the buyer is transferred title
- Acknowledge which changes of the property need approval from either the buyer or seller. This includes lien waiver agreements, permits and insurance.
- Building code certificate of compliance
- Document regarding the right to an inspection on the buyer’s behalf
- If the property was condemned, provide a statement in the language of 765 ILCS 67/26
- If payment is defaulted by the buyer, provide a statement in 765 ILCS 67/28
Still here? Good, because that list is vital and it’s important not to skip a single step, since none of them can be waived by either the buyer or seller.
How Do Contract For Deed Payments Work?
Like a mortgage, deeds incur monthly payments on the buyer. Your payment will be divided to cover every aspect that needs compensation such as interest, the principle and potential property taxes.
Should you ask for it, the seller will be required to supply you with an account statement containing the following details:
- How much of the principle has been paid
- Further charges
If you ask the seller for a statement more frequently than once a year, they can bill you for production costs, unless changes have been made to the contract.
Be sure to pay attention to the payment structure of the contract. If the monthly payments don’t cover the full purchase price, there will be a required balloon payment at the end. This is one final lump sum to be completed after the initial monthly payments. Calculate this early on to be prepared for it when the time comes.
Risks Associated With Contract For Deeds
Naturally with extensive mortgage payments, there’s a foreclosure risk since there’s no equity in the property until the price has been fully paid. Should the buyer default, it would not only cost the seller money but the entire process would have been a waste of their time and energy. If the seller knows the buyer has defaulted, they can foreclose the property at will, denying the buyer any form of recourse against them.
Not only can the buyer default, but there’s a possibility that the seller may go missing, bankrupt or even pass away. Any of these circumstances would put the contract in jeopardy and place the home into probate. Should that happen, the only choice the buyer has to claim ownership would be to go through litigation. This method is expensive and time-consuming, but when the seller is unavailable, it unfortunately would be necessary.
A missing seller isn’t the only thing to look out for; incompetent ones exist as well. On some occasions, the seller will neglect to deliver payments from the buyer to the lender, showing no record of progress.
Further Deed Risks For Buyers
Should a default occur and the seller files a Notice of Cancellation, there’s only a 60 day time period for the buyer to subsidize the attorneys in order to reinstate the contract. Compared to the minimum of six months given to mortgagors facing foreclosure, it’s a very short time frame.
Balloon payments are a massive risk to undertake. Often to fulfill this payment, the buyer has to take on another, more traditional mortgage to finance it. If the buyer can’t obtain this loan, it’s very possible they’ll face a cancellation of the contract and end up worse off than in the beginning.
As a buyer, if you’re looking to improve your credit profile after entering a Contract for Deed, rethink that strategy. More often than not, credit agencies don’t receive reports from sellers, and without a report your profile won’t improve. The buyer can attempt to send a letter written by the seller clarifying they’re paying their fees on time. But it will most likely be ignored, since lenders only accept direct reporting from the seller.
Contract For Deed Procedures
A cooling off period is normal for these types of contracts and lasts three business days. This means that the buyer has to wait until the expiration of this time before they can proceed with or close the contract. Should the buyer wish to cancel the contract within that 3 day period, it’s possible for them to do so.
Recording the contract is another time-consuming process and the seller must complete it within 10 days of the sales date. If the seller wishes to record a memorandum, it must use the capitalized title “Memorandum of an Installment Sales Contract” and incorporate these points.
- PIN or permanent index number
- Names of the buyer and seller and their notarized signatures
- Date the contract was implemented
- The property’s complete address and legal description
Performing this protects you by keeping your rights in the public record, denying the property’s sale to another buyer. If the seller refuses to record the contract then the buyer has every right to cancel it.
Once the deed takes place, there’s nothing to prevent a storm from damaging the house or from a defect popping up. If that happens, who should take responsibility — the buyer or seller?
That depends on what you’ve agreed to in the contract. Normally the buyer handles repairs once they’ve completed the purchase. The seller can be responsible for fixing existing repairs if they agree to that. But if they knew defects were there from the beginning but didn’t disclose that information, they’re guilty of fraud and are now legally obliged to pay.
When the seller does eventually go ahead with repairs, they have to provide three days notice, unless it’s an emergency.
In a Contract for Deed, if you fail to adequately make your scheduled payments, the seller can cancel the contract. If you’re residing in the property, the seller must advise you of the cancellation and wait 30 days before they can request permission from the court to evict you. If you manage to pay within those 30 days, then the contract would resume.
If the situation does go to court and you lose your case, you can request a postponement of your eviction for up to 60 days. There’s a saving grace period if you’ve paid off a minimum of 25% of the purchase price. At this point, the judge can give you up to 180 days before eviction, and if you catch up to what you owe prior to the deadline, you can keep the house and revert back to the contract’s original conditions.
If it’s discovered that you are in default, the buyer will be credited by the seller for the amount spent on property repairs prior to the sale.
A Contract for Deed requires a lot of paperwork, a trustworthy seller and a strict time frame. If you’re against owing money to a bank or have a poor credit score, then it’s something to look into. But don’t proceed without speaking to a lawyer who has experience in this field first. Otherwise you might make a critical mistake that could cost you significantly.