A contract for deed is an agreement between a buyer and a seller of property whereby the buyer makes installment payments to the seller until the purchase price is paid in full. It is sometimes called a land installment contract, an installment sales agreement, or a bond-for-deed. When all payments are made the buyer will receive a deed showing legal ownership of the property.
For most people who need to purchase a home, a traditional mortgage loan is the best option. However, a contract for deed provides some advantages for both buyers and sellers. For buyers who have difficulty getting approved for a mortgage loan, the contract for deed allows them to start building an equity stake and can provide a path to home ownership.
For sellers, the contract for deed provides an alternative source of income. Particularly for sellers who might have difficulty finding a traditional homebuyer, a contract for deed can be an easier way to make a sale. In addition, sellers have the benefit of getting incrementally paid through installment payments rather than having all the capital up-front.
The Risks of a Contract for Deed
A contract for deed is not always a good option for buyers or sellers. The structure of the agreement shifts risk to the buyer, since they are providing the payments. In the event the buyer defaults on the contract, the seller can take legal action to repossess the property. For buyers, this could mean losing the equity they have built in the property.
For sellers, a contract for deed may mean foregoing the help of a real estate agent. In addition, a seller will not be able to access the funds for the duration of the contract, leaving the seller without the liquidity of a traditional home sale.
Making the Most of a Contract for Deed
If you are considering a contract for deed, make sure you understand all the risks and the details of the agreement before signing. Both buyer and seller should hire attorneys to ensure that the contracts are airtight and that the rights and interests of both parties are protected. It is also important to go through a title search to ensure that the ownership of the property is properly transferred.
Contracts for deed have advantages for buyers and sellers, but they also come with risks. Before going into an agreement, make sure to research all potential options, protect yourself with the help of an attorney, and conduct a thorough title search.</p