Arizona Contract for Deed—What You Should Know

Most buyers assume there are only two ways to buy real property: pay cash upfront or secure a mortgage from a traditional lender. However, another option exists in Arizona known as a “contract for deed.”

A contract for deed offers an alternative route to purchasing real property. A contract for deed can be used in a variety of situation, but may be attractive particularly when buyers do not have access to or qualify for traditional financing or when sellers prefer to structure the sale themselves. A contract for deed may be a useful legal tool in certain situations, but using a contract for deed for the sale of real property requires careful consideration of its benefits, limitations, and legal implications.

What Is a Contract for Deed in Arizona?

A “contract for deed,” also known as an installment sale agreement, land contract, “rent to own” agreement, or agreement for sale, is a financing arrangement between a buyer and a seller for the sale of real property. Unlike traditional mortgage financing, the seller acts as the lender, providing financing directly to the buyer who pays the seller monthly payments that include principal and interest payments.

Using a contract for deed the buyer makes payments to the seller directly, rather than to a mortgage company. The seller then receives installment payments rather than a lump sum at the closing date. The title for the real property is then transferred by the seller to the buyer once the final installment payment is made or the purchase price is paid in full.

Under a contract for deed agreement:

• The buyer initially pays a negotiated purchase price, often starting with a significant down payment.

• The buyer then makes regular monthly payments directly to the seller, which usually include both principal and interest payments, until the full purchase price is paid.

• The seller retains legal title to the real property as security during the contract period.

• The buyer immediately receives equitable title, sometimes called purchaser equitable title, allowing them full use, occupancy, and the right to improve the real property. The buyer’s equitable rights gives the buyer full and immediate rights to the occupancy of the real property, but is not recorded.

• Upon completion of all payments, the seller transfers legal title of the real property to the buyer through a payoff deed, the deed is then recorded with the county recorder by a real estate law firm, title company or trust company. Upon recording, the buyer has full legal title to the real property in addition to the equitable title received upon execution of the contract for deed.

Because a contract for deed is based on monthly principal and interest payments to the seller while the seller retains legal title of the real property, contracts for deed are often erroneously referred to as “rent to own” agreements. However, contracts for deed are true purchase contracts, the buyer gains an immediate equitable ownership interest in the real property; while the seller maintains title to the property on paper pending completion of all payments.

Historical Background and Use in Arizona

Contracts for deed have been used for decades as a flexible solution for both residential and commercial transactions. In Arizona, contracts for deed have gained popularity during times of tight credit markets and have become a preferred method for owner-financed deals, particularly for vacant or rural real property.

Contracts for deed are especially helpful for buyers who may not meet the criteria of traditional lenders. Contracts for deed also appeal to sellers who want to maintain control of the property and receive steady set income.

Understanding the Structure and Obligations

When entering into a contract for deed, both parties agree on terms governing the sale or purchase transaction. Often when a contract for deed is used as the purchase contract, the parties are familiar with one another and are able to avoid using and paying a real estate broker, so key terms may go overlooked. Overlooking key terms is a mistake, to avoid future issues, the terms of the contract for deed should include:

• The total purchase price.

• The amount of the initial down payment, often higher for a contract for deed because of the seller’s increased risk.

• The schedule and amount of monthly payments, including principal and interest payments.

• The interest rate and how interest will be calculated.

• The purchaser’s obligations regarding maintenance, taxes, and insurance.

• How the seller may collect monies owed or impose liens if the buyer fails to make timely payments.

• A legal description of the property.

• Whether there is any personal property included in the sale and if so, a separate agreement executed to identify and transfer such items.

The structure of a contract for deed differs from conventional mortgages and from similar executory contracts. It’s essential that both parties understand how title to the property and payment obligations are structured and any late payments or defaults are handled.

Why Consider a Contract for Deed?

Contracts for deed offer flexibility and speed, which appeals to both buyers and sellers. For buyers who do not qualify for loans through a bank or governmental entity authorized to lend (such as a savings and loan association or federal credit union), a contract for deed may be the only viable way to acquire real property.

Sellers often prefer contracts for deed because they allow them to:

• Retain seller’s title as security until the purchase price is paid.

• Earn steady income through interest and principal payments.

• Avoid the complexities of working with a third-party lender.

These benefits make the arrangement attractive in cases involving rural or undeveloped land. But contracts for deed are also used in urban and suburban transactions, particularly in tight lending markets. Another common use of a contract for deed is between family members or friends. In all such situations, it is important to solidify the terms prior to entering the contract for deed to avoid overlooking key terms and issues.

Risks and Important Considerations

Like any legal agreement, contracts for deed come with risks, specific to a contract for deed are:

• Default and Forfeiture Risk: If the buyer fails to make payments, they may lose their interest in the real property and all payments made. The seller can initiate forfeiture or foreclosure proceedings after providing the required legal notice to collect monies owed or regain the property.

• Title Risks: The seller retains legal title until full payment is made. Any undisclosed liens, delinquent taxes, or financial obligations attached to the property can create significant complications for the buyer.

• Unrecorded Agreements: If the contract isn’t recorded with the county recorder’s office, the buyer’s equitable interest may not be protected against claims from third parties.

• Lack of Oversight: Contracts for deed often bypass traditional oversight by escrow agents or lenders. Working with a title company or real estate attorney helps ensure terms are clearly defined and enforceable.

• Ambiguity in Terms: Without well-drafted terms, misunderstandings about insurance, taxes, or default remedies are more likely.

Engaging an attorney preferably to draft or at least review the contract for deed agreement, and using a title company to handle due diligence, can help both parties avoid costly and unintended mistakes.

Enforcing a Contract for Deed in Arizona

If a buyer fails to make payments, the seller must follow specific procedures. This includes issuing written notice. Under Arizona law, contracts for deed are treated similarly to mortgages under the revised statutes.

The seller must give the buyer a window to cure the default. If the buyer remains in default, the seller can pursue a forfeiture or initiate a judicial foreclosure. The contract for deed should outline default remedies and timelines to ensure enforceability and provide clarity to the contracting parties.

Comparison with Lease-to-Own Agreements

Lease-to-own agreements and contracts for deed share similarities, but differ in legal effect:

• In lease-to-own, the buyer rents the property with an option to purchase later. Equitable and legal title stays with the seller, the buyer is a true tenant until they exercise an option to purchase.

• In a contract for deed, the buyer immediately receives equitable title and assumes many of the responsibilities of ownership, the lack only the paper or legal title.

This distinction affects how disputes are handled and what rights the buyer has during the term of the agreement. In a lease to own arrangement a defaulting tenant is evicted according to the Arizona Residential Landlord Tenant Act. In a contract for deed, a defaulting purchaser may lose their investment through judicial forfeiture.

Practical Tips for Buyers and Sellers

Whether you’re the buyer or seller, these steps can help ensure a smooth transaction:

• Work with a real estate attorney to draft or review the contract.

• Verify the property has a clear title using a title company.

• Clearly identify any personal property included in the sale in a separate agreement.

• Use an account servicing agent or servicing agent to collect and manage payments.

• Include provisions for enforcement in the event of a dispute.

Frequently Asked Questions

Is a contract for deed allowed under Arizona law?

Yes. Contracts for deed are recognized under Arizona law and must comply with applicable Arizona Revised Statutes provisions for contracts for deed. Proper documentation, execution, and recording are essential to their enforceability.

What happens if a buyer fails to make payments?

If a buyer fails to make payments, the seller must issue written notice via certified mail, return receipt requested. If the buyer does not cure the default, the seller may pursue forfeiture or foreclosure as outlined in the contract.

How is a contract for deed different from a traditional deed transfer?

With a traditional transfer, the buyer receives full title at closing. With a contract for deed, the seller retains legal title until the full purchase price is paid. The buyer holds equitable title until payment of the purchase price in full.

Can a contract for deed include personal property?

Yes. If personal property is included in the transaction, it should be listed in a written agreement.

What are the tax implications of a contract for deed?

Sellers must report interest income. Buyers may be able to deduct interest paid. Both parties should consult a tax advisor.

Should I use a title company or attorney for a contract for deed?

Both. A title company can confirm the seller’s title and handle the recording of documents. A real estate attorney can protect your rights and help avoid costly errors.

Considering a Contract for Deed?

A contract for deed is a tool for both buyers and sellers in Arizona real estate. It offers a flexible alternative to conventional loans and enables creative solutions in a variety of markets, especially those involving rural land, undeveloped parcels, or buyers with nontraditional financing needs.

However, like any real estate agreement, it requires thorough documentation, clarity on rights and obligations, and legal guidance. Both parties should understand how the agreement functions, from the initial down payment to the final deed transfer, and what to expect if either party defaults.

The real estate attorneys and staff at Orangewood Law Group PLC specialize in Arizona contracts for deed. If you are considering entering into or proposing such an agreement, or need assistance with an existing agreement, we provide expert guidance and representation.

Contact us today at (480) 500-9741 to learn how we can support your real estate goals.