In the past few years, it has gotten harder and harder for homebuyers to qualify for a mortgage. Some financial advisors are predicting that borrowers with limited options may turn to less conventional financing options.
Well, like a contract for deed.
Contract for Deed
Although not commonly recommended, a contract for deed is an alternative means of financing a home purchase.
A contract for deed is a transaction between the seller of the property and the purchaser of the property. Instead of a private lender or bank financing the purchase price, in a contract for deed, the seller finances the sale of his own property. In addition to being known as a “contract for deed,” this arrangement is sometimes called an “installment land contract,” a “bond for deed,” or simply, a “land contract.”
But whatever name it is known by, the arrangement is one where the buyer agrees to pay the purchase price and takes possession of the property, but the seller (the original owner) retains legal title to the property. The buyer generally pays little or no money down for the property but makes monthly installment payments. Because the seller retains title to the property until the entire purchase price has been paid, if the buyer defaults on any of the monthly payments, the seller can simply cancel the contract, and resume possession of the property. The seller can also keep all previous installment payments made by the buyer as liquidated damages. In the event of a default, the seller can reclaim the property without the need for a judicial order or having to hold a foreclosure sale. Because the laws governing the contract-cancellation process differ from jurisdiction to jurisdiction, you should always consult with experienced real estate counsel where you live to learn how this is handled in your state.
Lack of Consumer Protections
One of the reasons why a contract for deed is not generally recommended as a means of financing a home purchase is because it lacks a significant number of consumer protections afforded by a conventional loan. Some of the pitfalls of this type of financing include (are not limited to):
- the sales values of the home may be more than what the home would appraise at,
- interest charged for these types of contracts are well over prime – typically around 10 percent,
- Buyers purchase the home “as-is” without condition disclosures from the seller or a third-party inspection,
- The forfeiture clause essentially allows the seller to retain the property and all payments, including equity gained and the value of any improvements made, and allows the seller to evict the buyer immediately.
Before you enter into a contract for deed, consult with experienced real estate counsel.
Protect Your Property Rights
At the Law Offices of Mark Weinstein we handle all types of real estate cases. We have offices in Cumming, Georgia, and we serve Atlanta and a number of the surrounding counties including: Clayton County, Cobb County, Dekalb County, Douglas County, Fulton County, and Paulding County, among others. You can contact us here or call us at 770-888-7707 to schedule your free phone consultation.