Also known as a land contract, a contract for deed is a written contract between both a seller and a buyer regarding property. With this contract, the seller provides financing to the buyer in order to purchase the property for an agreed-upon price and the buyer will repay the seller back in installments.
Under this contract for deed, the seller will retain the title to this particular property, while allowing the buyer to possess it for all purposes other than ownership. The sale price is generally paid for in installments. A balloon payment or a larger one will be made at the end of the loan period to make the payments time shorter. When the full price has been paid back with interest, the seller is obligated to give the title of the property to the buyer. A down payment is also required with this type of contract and the legal status of these particular contracts varies from state to state.
This special type of real estate contract specifies the sale details of a specific real estate item. In most real estate contracts, the seller themselves does not provide the loan to the buyer, but is received from a third party lender. When third party lenders get involved, a lien known as a trust deed or mortgage is placed on the property in question so that the value of the property is collateral until the loan is paid in full unlike that of a contract for deed situation.
Reasons for a Contract for Deed
The most common use for this type of legal contract is for short-term seller financing. The date on which the full amount is due will be many years sooner than the purchase price itself is paid in full. This results in one larger payment toward the end of the loan period. Since the final payment is so large, many buyers will get a mortgage loan just for that amount as opposed to one for the entire amount equivalent to the price of the property. This makes it easier for those with less than desirable credit or without the means to put down a large down payment to purchase a property. This type of legal arrangement is also used when a seller is eager to sell and the buyer isn’t given enough time to find financing.
Advantages of Using a Contract for Deed
When a third party lender is involved in a contract, this puts that party’s interest into the arrangement. This also makes establishing the value of the property and the correct title a competing interest for the lender themselves. The lender will require title search, title insurance and appraisal, all adding to the cost of purchasing this piece of property.
A third party also adds to the closing costs, which the seller or buyer is made to pay. If the seller is also the lender, these costs usually do not apply, making the cost savings immense and fewer complications associated with the process. Generally a land contract allows a buyer to assign their interest in a property to another buyer before the loan is paid for in full, allowing them to resell their equity without a difficult legal process. Also, a contract for deed generally can be renegotiated if needed, which results in a better financial future without a loan default mark on one’s credit history.