A Guide to Contract for Deed
When purchasing a home or other real estate, the most common method of financing the transaction is with a mortgage. However, that is not the only financing option available to prospective buyers.
An alternative method of financing, known as a contract for deed, could be a good option for buyers who do not qualify for a mortgage or who want to simplify the purchasing process. But before entering into this type of financing agreement, it is important to understand what it is and the requirements involved.
What is a contract for deed?
A contract for deed, also known as a land contract, is an alternative method for financing the sale of a house or other real estate. The buyer and seller agree to an installment plan, where the buyer pays the seller directly over a period of time instead of in one lump sum when the transaction closes.
Contract for deed vs. mortgage
A contract for deed and a mortgage share some similarities, such as the buyer taking possession of the house immediately and regular payments over a long period. The buyer is also responsible for property taxes, maintenance, and other upkeep associated with the house in both financing scenarios.
However, there are fundamental differences between these two types of financing that are important to understand.
Mortgage
A mortgage is a type of loan financed by a bank, credit union, or other financial institution, which pays the seller the amount of the mortgage. The buyer then repays the mortgage to the lender over a period of time, usually 15 or 30 years. Taking out a mortgage to purchase real estate also requires the payment of different fees, such as application fees, origination fees, and other fees that are collectively known as closing costs.
If the buyer is unable to make their mortgage payments, they have certain legal rights. For instance, a mortgage lender is required to go through a specific process before they are able to foreclose on a house, even when the mortgage is in default.
Contract for deed
A contract for deed is a type of seller financing, where the seller agrees to give possession of the property to the buyer immediately. The buyer makes payments directly to the seller, usually monthly, over a period of time agreed upon by both parties and established within the contract. Because there are no third parties involved, contract for deed transactions generally do not have the closing costs that are associated with mortgages.
The buyer has fewer legal rights in a scenario where they are unable to make payments to the seller. Whatever rights the buyer does have are generally spelled out in the contract, and if the buyer is in violation of the contract the seller can repossess the house and keep the total amount paid up to that point.
Contract for deed requirements
A contract for deed is a high stakes contract, and as such it is important to make sure that all requirements are met. If any of the requirements are not met, the contract could potentially be considered unenforceable, putting both the buyer and seller at risk. In addition to the various reporting requirements in place for the sale of real estate, the contract itself is subject to specific requirements.
The following requirements are not exhaustive and are not to be considered legal advice.
Signed
First and foremost, a contract for deed has to be signed by both parties before it can be considered valid and enforceable. Real estate contracts can be signed electronically, which saves time and offers protections for the buyer and the seller through robust anti-tampering features.
Notarized
A contract for deed also needs to be notarized. An increasing number of states are permitting remote online notarization. However, the admissibility of this type of notarization varies by jurisdiction, so it is important to verify the local requirements before notarizing any legal document.
Submitted
The buyer is responsible for recording the transaction with the county where the home is located. This is generally required within a few months of the transaction being completed. Failure to properly record the transaction could result in a fine for the buyer.
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