Contract for Deed in Real Estate Transactions

In some cases, parties agree to a contract for deed instead of the common third party mortgage to conduct the sale of property.   Also known as a “land sale contract,” or “installment sales contract,” in this contract for deed sale the seller agrees to finance the sale of the property to the buyer himself.   The contract for sale agreement usually includes a down payment, an agreed-upon series of monthly payments, and often a balloon final payment, although there is a great deal of leeway in the parameters of a contract for deed.   The seller generally holds title to the property until it is paid in full, at which time it is transferred to the buyer; however, the buyer takes possession of the property upon execution of the contract.   The buyer may sell their interest in the property during the period in which they are under contract to the seller, although that can be a complicated process, as well.

Purpose of Contract for Deed      

There are several reasons to choose a contract for deed instead over a normal third-party mortgage.

  • The buyer is unable to qualify for a standard third-party mortgage or provide an appropriate down payment
  • The seller and buyer wish to complete their transaction quickly, and a contract for deed does not require much of the time-consuming paperwork and legal reinforcement that a standard mortgage requires
  • There is a much shorter term to the contract for deed, often because of the final balloon payment.  
  • There are fewer requirements and therefore lower closing costs to a contract for deed

Terms for a Contract for Deed

The terms for a contract for deed can vary greatly, depending on the needs and financial capabilities of the parties involved.   In most cases, however, there are some standard terms that can be found in a third-party mortgage, such as an amortization schedule, regular installment payments which include interest payments, and often an escrow account for insurance and taxes.   There can even be unique financing terms, such as negative amortization, long amortization, short balloons, interest only loans, and more.

Legal Title vs. Equitable Title

While the seller holds legal title to the property under a contract for deed until the purchase price plus interest is paid in full, the buyer holds equitable title, meaning they are entitled to live on and possess the property, just as with a standard third-party mortgage.   There can be questions about ultimate title at the end of the contract if there are some irregularities in transferring title.   At that point, it may take a real estate lawyer and judge to determine final title to the property.   To avoid this problem, the buyer and seller may agree to hold the fully executed title in escrow with an escrow agent, with orders to turn it over to the buyer upon completion of the contract conditions.

Limitations of a Contract for Deed

The biggest drawback in a contract for deed is that a seller who has a mortgage on the property may find that their mortgage holder forbids a contract for deed sale of the property.   There can also be legal complications and expenses if the circumstances of either the seller or the buyer change before the contract is met.  

While a contract for deed can be a simpler way to transfer property from one party to another, it can be fraught with complications.   State laws vary in the parameters of a contract for deed sale, as well, that a real estate lawyer can help you discover.   It can be vital to consult an attorney to ensure the necessary protections have been included in a contract for sale.

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