Contract for Deed
A Contract for Deed is sometimes called a “Land Contract”, or “Installment Sale”. This form of financing has some advantages over a Mortgage or Trust Deed primarily because of the speed in which they can be put together plus they are fairly simple to structure. But there are risks to both the prospective buyer and seller. During this “cash crunch” when banks are reluctant to lend and many buyers have recently suffered financial blows because of high unemployment resulting in their credit being less than perfect; many have jumped on the bandwagon of using a Contract for Deed.
In a Contract for deed, the seller finances the sale of the property with a contract that includes the buyer agreeing to pay for the property over a period of time in installments. The seller on the other hand, remains in title (has all the benefits of ownership) and does not transfer title until the terms of the contract have been met. Typically this is payment in full of the purchase price. Because of the nature of the contract, this arrangement is often considered in the “Rent to Own” category.
The seller in a Contract for Deed is referred to as the Vendor with the buyer referred to as the Vendee. However for the purpose of discussing this type of transfer of property, we refer to them as a Buyer and Seller (Borrower and Lender). Even though a Contract for Deed may pose risks for both buyer and seller, it still has its’ place as a means for home ownership. Many States including California use the Contract of Sale (Cal-Vet Loans) and non-profit lenders take advantage of this form of ultimate title transfer as a means to promote homeownership for low to moderate income prospective homeowners and when used properly and responsibly can be used to stabilize neighborhoods and raising hope for many families by allowing them to build new credit and ultimately have title to a home.
The Contract for Deed is a familiar form of acquiring farms, ranch land and orchards as well as land development for future use in a path of progress property. Issues have come up over the years about “who owns the personal property attached to the land” such as crops, orchards and timber. Although outside the prevue of this website, it is an interesting subject we have become fairly familiar with over the years due to our representing land owners and developers as Real Estate Brokers.
Benefits accruing to the Vendee (Buyer)
- Speed and Simplicity – this method of acquiring a home generally can be accomplished even with the help of a Title and Escrow Company within days instead of weeks and months.
- Buyer typically can purchase with a lower than typical down payment. Sometimes only 5 or 10% particularly if agreeing to pay taxes and insurance.
- Buyer may have opportunity to purchase with less than perfect credit.
- If their old home hasn’t sold or they prefer no to sell in a buyer market, they have the opportunity to wait until market conditions improve.
- If seller is motivated they may be able to negotiate a lower than market price.
- Buyer may be able to negotiate the down payment as simply bringing the Mortgage Payments current.
- Buyer, if a rehabber or wealth builder may be able to negotiate a provision for assignment of the Contract to another Buyer at a significant profit.
- If using the Contract to rezone, improve, remodel the property, the added value can accrue to the Buyer.
- Buyer may be able to “Homestead” the home. (Check on benefits and risks)
Safeguards and Pitfalls for the Vendee/Buyer:
As in any real estate transaction, there exists a measure of risk. The secret is to mitigate as much of the risk by performing your own due diligence, obtaining the advice and/or recommendations of professionals, and putting together a practical and prudent strategy to safeguard your initial and ongoing financial obligations relating to the Contract. While Forms, Classes, Seminars and Books are available on the opportunities of Contract of Sale for that matter we suggest the following:
- Retain the services of a Realtor or Attorney who possess the skill set to negotiate and document your agreement. Although varied from case to case, there exists a general standard of practice regarding these kinds of transactions.
- You may want to consider recording your Contract for Deed in the property is located.
- Obtain a Preliminary Title Report (PTR) or some sort of a “lot book guarantee” which will provide and/or confirm existing and encumbrances on the property including the status of the property taxes.
- Review the Record Trust Deed to read and understand provisions in the Mortgage of Trust Deed that which the Lender may have imposed restrictions.
- In the Contract pay special attention who is responsible for paying the Hazard Insurance, HOA Dues, Assessments and Property Taxes.
- The Seller/Vendor may take the payments and not pay the underlying mortgage, taxes and insurance allowing the property go into default.
- The relatively short time it takes to cancel the Contract for Deed depending on how the Contract is structured.
Benefits to the Seller (Vendor) may include:
- A ready prospective buyer willing and able to provide up front cash flow and to make or assist in paying the existing mortgage payment.
- Pay all or part of the cost of ownership including taxes and insurance.
- Take care of the maintenance and upkeep of the property.
- Reduces the risk of owning a vacant property subject to vandalism and falling into disrepair.
- If the buyer/vendee fails to make the payments as outlined in a legally prepared Contract for Deed the Seller may have the right to repossess the property without a long protracted and expensive foreclosure process.
HOW THE NOTE SERVICING CENTER (NSC) CAN HELP
- The Note Servicing Company takes care of collecting the Buyer/ Vendee payment and paying the underlying Mortgage, Taxes and Insurance. The distribution of the Buyers payments must be agreed upon in writing in the Contract for Deed.
- NSC offers automatic withdrawal from the Buyers account to be paid directly to the Servicing Company for the payment of Mortgage, Taxes and Insurance or wherever directed. When and if, the Buyer/Vendee Assigns the Contract or sells the property to a new Buyer, the Note Servicing Center has the capabilities to continue the service and when instructed forward the excess funds to the original Vendee.
- NSC provides a plethora of Services (hyperlink to services) including Payment Coupons and Envelopes for Buyers, Annual IRS Tax forms, Annual end Monthly Statements, Payment and Histories.
- On-Line Account Viewing 24/7 is available for Investors using the Contract for Deed as an Investment Model.
Click here to Contact Us on how to set up Contract for Deed Servicing.