What is Contract for Deed?
We always receive phone calls from potential home buyers and sellers asking us what is contract for deed. In different states, contract for deed has different but similar terms and we often hear questions about land contract, deed for title, land contract sale, owner financing, etc. All these fancy terms are used across the country but all basically mean the same thing. In Minnesota, this form of financing is commonly known as contract for deed.
A contract for deed is an alternative financing agreement where seller (owner of the property) is acting as a lender and finances the sale of the property. Buyer agrees to repay seller the purchase price in monthly installments plus interest (if any). In a contract for deed sale, there is usually a balloon payment due within agreed duration. Buyer has to either pay off amount owed in cash or obtain a home loan to pay off the seller. During a contract for deed term, buyer has possession of the property and seller retains legal title until contract is satisfied or cancelled.
Although most of real estate is purchased with a mortgage/home loan, contract for deed is also a common way of acquiring property.
How does contract for deed work?
Contract for deed is very different from a traditional home loan in the way that it is structured and from a legal stand point but overall it works very similar, except there is no bank. Not everyone understand what it is and how it works and a lot of people shy away from it due to not knowing enough.
In fact, not every real estate agent and loan officer know what is contract for deed with. In a contract for deed transaction, buyer and seller agree on sale price, down payment (if any), closing date, interest charged (if any), duration of the contract, how much are the payments and when payments are due (amortization schedule), balloon payment If any, who pays taxes and insurance (unless escrow is set up), etc. So in essence it is similar to a loan but both buyers and sellers should always seek legal advice because the legality can be very tricky, especially when there are loans against the property that seller has.
Closing is a lot simpler than a traditional real estate purchase transaction. Mainly because there is no bank/loan officer involved which means no underwriters and no appraisals (unless buyer requests an appraisal). Typical traditional closing may take 45-60 days but contract for deed can close in 1-2 weeks at a title company. It could be as fast as 1 day if buyer and seller decide to close on a kitchen table (highly discouraged). If you don’t know what is contract for deed – seek legal advice or work with an experienced and trustworthy professional.
Benefits for Buyer
Why should a consider buying a home on a contract for deed?
Well, there are many different reasons that each buyer might have. Sometimes it is lack of credit, sometimes self-employment or past financials issues are preventing from getting a home loan. Therefore, contract for deed become attractive to home buyers that can’t obtain a loan. Although there are negatives about, here are a few benefits to the buyer:
- Start building equity early
- Ability to purchase a house without much capital in hand
- No need to obtain financing/home loan
- Quicker and simpler transaction
- Room to manage and plan finances for repayment, you can negotiate the payment
- Possibility of negotiation to get favorable terms and conditions in the contract
- Courts and tax laws recognize this form of ownership
- Much easier to get qualified for a refinance than a purchase later on
- No more rent payments
In short, making the purchase gets much easier for the buyer especially if he/she is going through a credit challenging time or does not want to make a huge investment at the moment. However, finding a seller willing to carry the contract is challenging. Also, not every seller knows what is contract for deed so a great deal of education might be needed.
Benefits for Seller
A contract for deed definitely reaps benefits for a buyer, but what’s in it for a seller? Sellers also have a few benefits when they decide to sell a home on contract for deed
- Larger number of potential buyers
- Ability to ask for a better price
- Receive much higher interest than a savings account
- Safer investment than stock market (not always)
- No tenant turnover
- Buyer takes care of the repairs!
- No rental license needed
- Get a down payment which doesn’t happen in a rental situation
- Easier to make a sale, especially during troubled times
- Possible tax benefits
Not every contract for deed is a win win. It is recommended to seek legal advice or to work with an experienced licensed real estate agent.