What is a Contract for Deed?

What is a Contract for Deed?
What is a contract for deed? Read our blog post to learn more.

Most people assume that buying a home means getting pre-approved for a loan from a lender who fronts the money to “close” on the property. But, not all transactions for the purchase of property require a third party. In some cases the seller of the property is willing to “carry back” a portion of the purchase price and accept payment over time under the terms of a promissory note secured by a deed of trust on the property. In this way, the seller acts like a lender. Similarly, a “contract for deed” cuts out the need for a third party lender entirely.

A contract for deed, also referred to as an agreement for deed or an installment land contract, is a contract between a buyer and a seller where the buyer makes payments directly to the seller. The parties agree on the purchase price and the amount and frequency of the installment payments, among other terms. In some cases, payments are made over a period of many years.

Once a contract for deed has been formed, equitable ownership of the property immediately passes to the buyer, subject to the agreed-upon terms. This means that the buyer has all the rights of full ownership of the property even though the buyer is not the owner of record. The seller retains bare legal title to the property as security only until all payments on the property have been made. Then the seller is required to convey legal title to the buyer. If the buyer fails to make payments under the contract for deed, the seller has the right file a forfeiture action, a statute-driven process that may be compared to foreclosure.

Think of a contract for deed as an alternative to buying a property over time traditionally. Since traditional lenders are not involved, a contract for deed can happen quickly and without the usual commercial lending requirements. A contract for deed is flexible and can be tailored to fit the specific needs of both parties. In some cases, there is a compelling reason for a seller to own property without being formally identified as the owner of record on the title.

Before you sign on the dotted line, here are a few things (not an exhaustive list) you should consider regarding a contract for deed.

The property’s title does not transfer to the buyer until all payments on the property have been made. This means that even if the buyer legally owns the property after signing a contract, the buyer is not on the title of the property until all payment terms have been satisfied.

In a typical real estate transaction, the rules and regulations of lenders and title companies, such as a home inspection requirement, act as important safeguards in the transaction. Although these rules and regulations do not necessarily apply to a contract for deed transaction, it is a good idea to use a title company and to have some of the same safeguards in place as part of the transaction.

Buyers must beware of the pitfalls that are common in a contract for deed transaction. For instance, are there existing encumbrances on the property? Does the Seller have the obligation under the contract to satisfy any such encumbrances and not to further encumber the property? A contract or deed should be recorded to avoid the risk of the seller encumbering the property after entering into the contract.

The attorneys and staff at Orangewood Law Group, PLC are well versed with contract for deed transactions. Call us today if you are thinking about proposing or accepting a contract for deed or if you are having a problem with a contract for deed that has already been signed.

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