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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.
Meet some of our Contract for Deed Lawyers
August 2, 2021
I have been practicing law for more than 4 years at a small firm in York County, Maine. I recently decided to hang my shingle, Dirigo Law LLC. My practice focuses mostly on Real Estate / Corporate transactions, Wills, Trusts, and Probate matters.
August 5, 2021
My name is Melissa “Mel” Green and I provide legal counsel to entrepreneurs, start-ups, and small businesses that is clear, concise, and focused on the practical impact of decisions. As trusted legal counsel, I proactively identify risks, and develop effective, practical solutions that protect my clients businesses, create positive outcomes, and help mitigate legal exposure. My areas of expertise include business formation, contract law/commercial transactions, healthcare law, and intellectual property. I also provide services as an outside general counsel or “fractional general counsel”. Prior to starting my own law firm, I spent the majority of my career in-house at large and small corporations, both for profit and not-for-profit, working with senior and executive management, in addition to other stakeholders at a variety of management levels. to proactively identify and address risks, mitigate legal exposure, streamline processes, lead persuasive negotiations that are integral to ensuring positive outcomes for the organization, and deliver hands-on, spectacular client service. There came a time when I realized that individuals and smaller entities were not receiving the same level of legal support and guidance as mid-size to large companies and as a result, individuals and small businesses were not growing and sustaining on the same level. I wanted to use my expertise to provide those that were underserved by the legal market with competent counsel at an affordable price. With the increasing number of new businesses, I knew that I could make a difference to those that needed legal guidance but were putting it off in fear of “Big Law” prices. I love to “partner” with my clients, get a deep understanding of their business, develop lasting professional relationships and watch them prosper. I want to find a way to help my clients maximize the reach, value and impact of their business. Services that I have provided over the course of my career: (i) reviewing, drafting and negotiating commercial agreements (leases, MSAs and SOWs, consulting services agreements, confidentiality agreements, SaaS agreements, coaching agreements, independent contractor agreements, coaching agreements, photographer agreements, waivers and releases, licensing agreements, etc.), (ii) business formation (operating agreements, written consents, bylaws, etc.), (iii) preparing policies and procedures for businesses in highly regulated industries, (iv) conducting federal trademark searches and filing trademark applications/preparing trademark opinion letters after conducting appropriate legal research, and (v) general business counsel.
August 3, 2021
Robert is a skilled corporate lawyer, licensed to practice law in NY and DC. He has over 25 years of experience, with a focus on Venture Capital, Private Equity, M&A, General Business Law and Company Formation. Robert brings business side experience to every legal transactions. This allows him to shape a client's legal needs around its business goals to drive success in an effective and efficient manner.
August 3, 2021
Tim has 20 years of experience representing a wide variety of emerging and established companies in the technology, software, bitcoin and professional services industries. He works directly with his clients’ executives and boards of directors on corporate, intellectual property, and securities law issues. Recently, Tim has advised clients on Series A and Series B financings, corporate structuring, complex video licensing agreements, and structuring new hedge funds. Tim previously served as Forrester Research, Inc.’s General Counsel and Secretary where he was chief legal officer, led the company’s legal group, and managed the company’s legal and regulatory affairs. Tim played an integral role in the company’s initial public offering in 1997 and coordinated its secondary offering in 2000. He directed the legal process in the company’s acquisitions of Giga Information Group, Inc., Fletcher Research and Forit GmbH and oversaw over $125million in transactions. He also managed the company’s intellectual property assets. Tim is admitted to practice in Massachusetts and New York. Tim holds a Juris Doctor degree from the Boston College Law School and a Bachelor of Arts degree from Trinity College
August 4, 2021
I’m a New York based attorney with substantial experience in media and art law, corporate structuring and commercial contracts. For the past several years, I have been advising startups and new business on their legal needs, with a special focus on tech and entertainment.
August 4, 2021
Robert Jay H.
My Legal career hasfocused on representing businesses (corporations and limited liability companies) as general outside counsel. In this capacity, I have drafted a broad range of legal documents as well as analyzed proposed agreements drafted by the other party's attorney to the agreement for the pupose of determining the risks to which my client would be exposed. I maintained the client's minute book if no one in-house was available for that task. Additionally, if rquested, I served as a general advisor to the client's executive offers and to its Board of Directors.
August 5, 2021
Corporate counsel with years of in-house experience working with and reporting to board / executive-level and upper management, along with extensive regional / national law firm background in commercial transactions and contracts, complex commercial litigation, and employment matters. Skilled at executing corporate priorities, driving profitability by implementing goal-oriented processes to achieve revenue and productivity targets, and managing company litigation and outside counsel. Recognized for creating policies and practices to address ethical dilemmas and resolving misconduct.