OfflineA contract for deed is simply a document drawn up between a buyer and a seller for the purchase of a house. The seller retains ownership of the property until the house is paid off in full. There's no requirement to have a mortgage company, title company or real-estate agent involved in the transaction. Whatever terms are drawn up in the contract are legally binding. The down-payment amount, payment amounts and interest rate are all predetermined and included within the terms of the contract.
Features
Legal requirements for a contract for deed vary from state to state, as no federal requirements are involved. The contract itself is filed with the state when the buyer has paid off the house. The lack of legislative procedures is convenient; however, certain precautions should be taken by the buyer to ensure that the property is purchased, free and clear.
The purpose of a title company within traditional mortgage claims is to make sure there are no claims or suits filed against the property. At the very least, a buyer should have a title search done to avoid ending up with a property that has a lien or judgment against it.
Function
One key benefit of purchasing a house with a contract for deed is not having to worry about qualifying for a bank mortgage. As the agreement is solely between buyer and seller, the buyer assumes the responsibility of "financing" the purchase until the property has been paid off.
One thing to keep in mind if you're buyer is whether or not the seller is currently paying on a mortgage for the property you're purchasing. If this is the case, it's typically assumed that the buyer is using the payments he receives from you to pay on the mortgage. And while this might make perfect sense, there's no guarantee that the buyer is paying on the mortgage. Once the house is paid off under the contract for deed, the buyer may find out that money is still owed to the bank for missed mortgage payments.
Warning
The typical land contract includes a stipulation that buyers should pay particular attention to involving missed payments. It's not uncommon for any missed payments toward the purchase of the house to be considered a breach of the contract. In this case, any monies already paid toward the house are considered rent payments, meaning any monies paid or improvements made on the house are lost. The buyer-seller agreement automatically becomes that of a landlord and tenant.
As far as contract terms go, it should be clearly stated who will be held responsible for property taxes and house insurance. If these terms are not stated in the contract, the buyer bears whatever costs are due, be they back taxes or a total loss should a catastrophe occur.
Considerations
The contract for deed does offer more leniency in terms of buying a house; however, the seller usually has the upper hand within these dealings, with most of the risk falling on the buyer. That being so, the buyer can opt to have the house inspected and a title history done, as well as draw up some sort of stipulation that would require a seller to keep up on the mortgage payments during the term of the land contract. And while the entire purpose of using a contract for deed is to save some money, taking necessary precautions before signing off may save you a lot headaches and money once the property is paid off. Jacquelyn Jeanty
Here is a breakdown of the process for buying a home on a land contract:
1. Inspect the property yourself.
2. Discuss terms with the seller including sales price, down payment, interest rate, years of amortization and balloon payoff. If terms are acceptable, move on to #3.
3. Present a written offer to the seller. Make the contract subject to a satisfactory home inspection. Here are a few sites where you can get forms (Offer to Purchase) that will help you:
http://www.rocketlawyer.com/document/real-estate-purchase-agreement.rl?r...
http://www.lawdepot.com/contracts/real-estate-purchase-offer/?loc=US
Most likely the seller will do a background/credit check. If offer is accepted (i.e. signed and dated), move on to #4.
4. Deposit the down payment/earnest money deposit with a title company under the Seller/Buyer name.
5. Hire a home inspector. If inspection is okay and/or seller is willing to fix items, move on to #6.
6. Have a title search completed and buy Title Insurance. This is often times overlooked but is a very important step to make sure you are buying a property with clear title.
7. Use a title company or real estate attorney to create the Contract for Deed. Once the document is ready, both buyer and seller will sign and the contract begins.
I did this years ago all the owner wanted was down payment (1500) and monthly payments (325)no background check and he didnt even ask if i had a job lol i know crazy stuff.But i did cover my butt by going through an escrow company to keep all records in order for many years and had no problems.
Aaron
This is very useful. Thank you for the post.
DJ
The sky is not the limit; there are no limits. There is no box.
as a buyer, for my protection, I would insist on opening an escrow account with title company; title company would ensure that there are no liens on the property and that monthly payments are made to bank if there is still a mortgage on the property; also, when all payments are made to seller, title company would make sure that title of property is transferred to buyer's name.
Valerie
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A contract for deed is a process of seller financing. The difference between seller financing and contract for deed is that in a contract for deed the seller retains the deed. This makes the process of foreclosure for lack of payment easier.
Subject to is a type of seller financing where the seller has not entirely paid off their original mortgage. The payments from the buyer are paid to the seller who in turn pays their mortgage. Setting up an escrow in this condition would be advisable. This ensures that the payments made by the buyer are actually paid to the bank then the seller.
You can have conditions where there is a contract for deed while doing a subject to mortgage at the same time but I wanted to clarify the differences a little bit so that as people read these two different terms throughout the forums there is less confusion (that is unless my definitions created more confusion).
If you would like the chance to work with me or one of my fellow real estate investor coaches and our advanced training programs, give us a call anytime to see if Dean's Real Estate Success Academy and our customized curriculum is a fit for you. Call us at 1-877-219-1474 ext. 125
Thanks for your valuable input Nate!
Thanks for your input DJ. We are always outside the box so you are right...there is no box!
Often when you are purchasing properties you will want to purchase using seller financing. This allows you to get the full tax value of the property, get the appreciation right awayif any, and obtain full ownership control.
When you sell you may consider selling with contract for deed as you will have an easier time foreclosing, in most cases, and you get to retain most, if not all of the benefitss of an owner.
If you would like the chance to work with me or one of my fellow real estate investor coaches and our advanced training programs, give us a call anytime to see if Dean's Real Estate Success Academy and our customized curriculum is a fit for you. Call us at 1-877-219-1474 ext. 125
Ive done three deals this way now.. You get control and when you put it through an escrow you get benefits.
These type of deals are everywhere, I know they teach us here on the Deans ways and they are correct...But when a seller will not do it any other way for what ever reason if its a good deal take it.....Yes you will have holding cost, pretty it up RENT it, then you have time to market it and sell it with a renter in place..
I have to add pretty it up will cost you! Think about it, whats it cost to paint yes do it yourself and a good shampoo the carpet and some landscaping?
Hmmmm GO to lowes and ask before you buy! Wait a minute we can do this even when we don't have a house....Go get prices on everything it takes to rehab......Sorry for being so...... But lets find out how much it really cost to rehab so we can get our numbers right..
make sense?
Aaron