Something new I’ve been encountering, as buyers find ways to avoid banks and other traditional lenders, is the “contract for deed” also known as an “installment land contract” or “bond for deed”. A contract for deed is another method of seller financing. In this setup, the seller and buyer enter into a contract for deed which allows the seller to remain the owner of record as the buyer makes payments toward the purchase of a property.
A contract for deed differs from typical seller financing, involving the execution of a promissory note in favor of the seller; filing a deed of trust/mortgage; and transferring title over to the buyer before the debt is fully paid.
With a contract for deed, the seller and buyer will agree on a purchase price, interest rate, payment schedule, possession of the property, and additional loan terms as needed. Then the contract for deed is recorded to put others on notice of buyer’s interest in the property.
Once a set amount of payments have been made toward the purchase price, the seller issues an executed deed, recorded with the property county, conveying the property to the buyer. Some of the benefits of a contract for deed are:
Buyer Benefits:
- Potentially lower interest rates than a bank or hard money lender might provide(some sellers may use higher interest rates knowing the buyer can’t secure a traditional mortgage and to compensate themselves for the risk);
- Transactions can close faster with fewer approvals; relaxed credit requirements; and less documentation as no institutional lender is involved;
- Allows buyers to purchase homes/property they wouldn’t qualify for under traditional loan strictures;
- Doesn’t affect a buyer’s credit score, as the payments are not reported to the credit bureaus; and
- Lower closing costs.
Seller Benefits:
- In the case of a buyer default, the seller still has the property in their own name and buyer’s previous payments may be forfeited. The buyer can also be evicted. The seller has greater protections than they would with a typical promissory note and deed of trust. Here, there is no need for a drawn out foreclosure proceeding;
- Lower closing costs; and
- The seller gets their money faster and with interest. Typically the contract for deed is for a shorter term than traditional mortgages and require monthly payments before a final balloon payment to satisfy the balance owed seller
If you are seeking alternative ways to fund a purchase or to make a sale work, and have any additional questions please feel free to contact me at smacpherson@patellegal.com or (972) 435-4339.