A contract for deed, also known as a land contract, is basically a financing agreement between the buyer and the seller of a home.
Contract for deed ins and outs
Essentially, by signing a deed contract, the seller agrees to give the deed to the home to the buyer once the buyer has paid off the contract. This kind of financing carried by the owner can include the balance of a mortgage or, instead, the property might be fully owned.
Sometimes known as “rent-to-own” or “installment sale contracts,” land contracts historically offered lower borrowing rates than most lending institutions. But, once banks began offering lower interest rates, they became less popular. However, this seller-financed option is making a comeback.
This article will go over the benefits and drawbacks for both buyers and sellers. Keep reading to learn more.
Benefits to the Buyer:
1. Less stringent qualification requirements, though the seller can ask for a copy of the buyer's credit report.
2. Usually the seller will offer negotiable down payments and greater flexibility.
3. More freedom to negotiate length of contract, terms and interest rate.
4. Lower closing costs with no service fees to pay.
5. Faster purchase closing.
Benefits to the Seller:
1. Can normally ask a higher selling price with less inspection restrictions.
2. Income can possibly qualify as deferred gain, significantly reducing taxes.
3. Provides a monthly income.
4. Can offer a better rate of return than investing the sale amount.
5. Simpler way to sell non-conforming or difficult properties.
6. Faster purchase closing.
The Importance of a Title Company and Trustee
For the inexperienced homeowner or buyer, having the insurance of a trustee can stem a lot of insecurities. Basically, the title company will draft and insure a land contract that includes a Vendor (the homeowner), Vendee (the home buyer) and a Trustee.
The title to the house and all interest payments are assigned to the trustee. If the buyer (or vendee) stops making payments, the trustee will then foreclose on the sale. In turn, if the buyer successfully finishes making their payments, the trustee insures the buyer receives the full title to the home.
Before You Sign
Before you commit to a land contract sale, always obtain an appraisal of the house value, acquire title insurance, consult with a real estate lawyer and hire a holding company or trustee to hang onto the deed and all contract documentation.
Remember, contract for deed sales are usually friendly, but it's still business so all parties involved need to work together with professionalism.