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What is a Contract for Deed?
A contract for deed, also called a land contract, is a legal agreement for the sale of property between a buyer and seller, alternative to a mortgage. When a homebuyer agrees to a contract for deed, the buyer holds the title on the home while the buyer makes payments until a predetermined amount has been paid, at which time the property deed is officially transferred.
Pros and Cons of a Contract for Deed
A contract for deed allows hopeful homeowners to make payments directly to a seller for a predetermined amount of time to buy a home. While contract for deeds might make it possible for some to purchase a home that they would not otherwise have access to, there are still pros and cons to the agreement.
Pro 1: Flexibility
Typically, when homebuyers set out to purchase a new home, there are several rules that must be followed. Banks and lenders look at an array of financial information and other terms to determine whether a person qualifies for a home loan. With a contract for deed, individuals can be considered on a case-by-case basis with flexible terms that work well for both parties involved.
Pro 2: Less Time Waiting
Since a contract for deed involves no traditional lender, buyers and sellers don’t have to complete a qualification stage before moving on to completing their transaction. Since there are no third parties in the transaction, the buyer and seller can facilitate a much speedier process than with traditional lending.
Con 1: In Case of Default
When a buyer defaults on a payment under a contract for deed, there are little to no protections in place for them. The seller is fully within their rights to evict the seller. Any equity that had been obtained in the property would be forfeited in this scenario and unlike with a traditional mortgage note , the buyer would have no opportunity to pay the balance of the loan to retain ownership of the home.
If a seller defaults on their mortgage for the property, the buyer could lose the home even if they are up-to-date on their payments. In this scenario, though, the buyer would be eligible to sue the seller for damages and to vacate the contract.
Con 2: Higher Interest Rates
Since the terms of contract for deeds are typically less stringent than with traditional loans, the interest rates are likely higher. This is especially true if a lower down payment is negotiated or if a buyer opts to use a contract for deed due to less-than-perfect credit.
Check out this article to learn more about the pros and cons to signing a contract for deed.
Contract for Deed Examples
A contract for deed helps many people that might not otherwise qualify to purchase a home. These legal agreements provide an alternate path to homeownership for those who can’t or don’t wish to go through a traditional lender.
Here are a few examples of how a contract for deed might look in real life:
- Louisa and Juan have four children and are in the market for a larger house. Upon speaking with a traditional lender, they learn that their credit score is not good enough to purchase a home. They decide to work with the seller of a home directly and agree to make payments of $1000 a month against the home for the next thirty years, at which point the deed will be transferred into their name – they sign a contract for deed.
- Zephaniah just turned eighteen and is in the process of looking for somewhere he can live on his own. His Uncle Janie reaches out to Zephaniah to offer him a small trailer home that he owns and says that Zephaniah can make payments to his uncle for the next five years to own the home. Zephaniah agrees and he and his uncle sign the contract for deed, making the deal official.
To learn more about contract for deeds, check out this article .
Image via Pexels by Kindel
Is Contract for Deed Similar to Rent to Own?
Even though contract for deed and rent to own scenarios are similar, they are not identical. They are both great for home hunters who may not have good enough credit to qualify for traditional lending or who want to get into a new home as quickly as possible. They also both offer more flexibility to sellers and buyers in comparison to traditional mortgage notes.
When it comes to making payments on the home, payments on the contract for deed and rent to own homes both go toward the equity. At the end of the period specified in either contract, the buyer must make a larger payment to secure the property deed to the home. Both contracts also customarily include interest.
There are a few major differences between the two scenarios that set them apart:
- Ownership : In a contract for deed, the buyer takes immediate ownership of the home following signing the agreement. In a rent to own scenario, the seller maintains ownership of the home, making them a landlord who is responsible for repair and maintenance of the home.
- Tax Benefits : The buyer of a property under a land contract is legally allowed to deduct things such as property taxes, insurance and mortgage payments on their taxes. Only sellers under rent to own contracts are legally permitted to do so.
- Obligation to Buy: With a contract for deed, the buyer is legally required to purchase the home at the end of the contract or sacrifice their credit as a result. In a lease to own agreement, the buyer has the option to do so, but can walk away unharmed if they decide against it.
To learn more about the similarities and differences of a contract for deed and a lease to own contract, check out this article .
Does a Contract for Deed Need to be Recorded?
Contract for deed agreements are recognized as formal mortgages under most state jurisdictions. Also, in order for a contract for deed to become legally binding, it must be notarized and filed with the courthouse local to the location of the home. If the documents are not formally filed, parties to the contract risk having any legal recourse in the event that anything goes wrong during the term of the land contract.
It is imperative that a contract for deed be recorded formally to protect both parties involved in the contract. Real estate lawyers specialize in drafting and filing contract for deed documents and should be used when formally recording them.
To learn more about the legal requirements of a contract for deed, check out this article.
Get Help with a Contract for Deed
Are you prepared to move forward with a contract for deed but not sure where to start? Experienced real estate lawyers can help with this process and any purchase and sale agreement requirements you must meet. Post a project on ContractsCounsel today to get connected with lawyers who specialize in contract for deeds.
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