A contract for a deed allows individuals who don’t qualify for a traditional mortgage to purchase property. It might also be a fast way to get property that does not involve using traditional banking options. It is essentially a contract between the purchaser and the property owner, where the owner receives payment in installments directly from the purchaser until the balance is paid off.

The purchaser assumes immediate rights of ownership without requiring a large (if any) down payment such as property tax exemptions, while the property owner retains title to the property until the deed is paid in full. If the purchaser at any time fails to keep making payments and defaults on the deed, the owner has the right to repossess the property.

Another term for this process is called “seller financing,” which is a valid way for property owners to protect their asset while relinquishing tax liability and other costs of home ownership. However, in the case of repossession of a defaulted property, many states require the owner to reimburse the purchaser for any improvements made to the property.

Structure of a Deed

Due to the fact that negotiations for deeds involve unique features of importance to the property owner and purchaser, they tend to not be a one-size fits all type of legal document. For instance:

  • Unlike a mortgage that a potential property owner would negotiate with a financial institution, there is no predetermined amount of time over which the deed can exist. The average tends to be five years; it can be for as few or many years as the two parties agree to. Nor are there usually any insurance requirements made upon the purchaser.
  • The interest rate on the purchaser’s payment is also negotiable and can be as high or low as the parties agree to.
  • Payment structure is negotiable. Owners can demand equal monthly payments over the course of the deed based on the value of the property or accept smaller payments to accommodate the financial situation of the purchaser until a balloon payment for full value is required at the end of the deed.

Advantages of a Deed to Property Owners

The ability to negotiate terms such as the length of the deed and deed payments are just two benefits derived from using deeds in real estate transactions:

  • It is a faster and less costly transaction to conduct as opposed to traditional property purchase agreements involving financial institutions and real estate firms.
  • The traditional fees, such as origination fees or closing or settlement costs that banks charge, do not apply to deeds.
  • Although laws differ from jurisdiction to jurisdiction, in the event of a foreclosure, the owner generally has a wider latitude of rights and can take repossession of the property quicker than if the loan was secured through a bank.
  • While retaining title to the property, the owner is no longer responsible for property taxes, upkeep, or insurance.
  • The owner, as well as the purchaser, can sell their interest in the contract.

Advantages of a Deed to Purchasers

There are several benefits to entering a deed agreement for purchasers:

  • Someone looking to buy a property but may not have the required collateral demanded by financial institutions can negotiate terms directly with the property owner and gain immediate ownership rights to the property.
  • It is a much faster process, so someone paying rent can begin applying those payments to acquiring a home sooner than usual through a standard mortgage process.
  • It’s a much more straightforward process and satisfies the aversion to banks that some people hold out.
  • Minorities who often face discriminatory lending practices can avoid the difficulty they often face in getting a mortgage by negotiating a deed directly with the property owner.

The Dangers of Deeds to Purchasers

While deeds do offer what appear to be attractive advantages to both owners and purchasers, there has historically been an abuse of the agreement, particularly against homeowners facing foreclosure and at the mercy of predatory lenders.

Although more common at the end of the last century, predatory lending, often also known as equity stripping, when it comes to property transactions, works like this:

  1. An investor locates a home facing foreclosure.
  2. The investor approaches the owner facing foreclosure with an offer to buy the property through a deed transaction.
  3. The investor sells the property back to the owner at an exorbitant interest rate and gains immediate equity in the property.

For this reason and others, it is important that anyone interested in acquiring a property with a deed seek the advice of an experienced real estate attorney.

To learn more about a contract for a deed, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.