How Does a Five-Year Contract Work?

A contract for deed, also known as a land contract or installment sale, is a type of seller financing that lasts from three to five years. It allows the property's title to stay with the seller until the total sale price is paid. A typical way to end the contract is with a balloon payment. If considering this type of contract, keep in mind these contract-for-deed terms of use:

  • Essential contract terms. Most cases involving a contract for deed include a down payment. Just like a standard mortgage, monthly payments include principal and interest payments as well as property taxes and mortgage insurance. Buyers and sellers can negotiate almost any term and condition.
  • Due-on-sale clause. Many conventional mortgage contracts have a due-on-sale clause. This lets a lender declare the loan's balance due under specific conditions. Occasionally, the title interest transfer triggers this clause.
  • Rights and responsibilities. A contract for deed always details the buyer's and seller's rights to the property. No title transfer occurs between the two parties, but both have an interest in the property. Buyers usually deal with the upkeep while sellers pay the mortgage.
  • Legality of contracts for deed. Recorded in the public record, contracts for deed are legally enforceable. Many sellers prefer to keep the contract details between themselves and buyers private.
  • Benefits for buyer and seller. Contracts for deed can help both buyers who need a home but have poor credit and sellers in difficult lending situations. One benefit is that they give buyers time to save for a balloon payment or down payment.

Contract for Deed

As a form of financing, a contract for deed offers several advantages over a trust deed or mortgage. Some of the advantages include:

  • Speed and simplicity. The process can take days instead of weeks or months.
  • A lower down payment. If the buyer agrees to pay taxes and insurance, there might only be a need to put down 5 or 10 percent.
  • Working with less-than-perfect credit.
  • A seller's ability to wait until market conditions improve.
  • A buyer's potential to negotiate a lower price or down payment.

Just as there are benefits, there are also some potential downsides to a contract for deed:

  • The seller keeps the legal title to the property until the buyer pays the contract price in full. As a result, the buyer doesn't have any rights to the property.
  • If the buyer defaults on the contract, he or she can lose all money paid.
  • Third parties that rely on the title may remove the buyer from the title rights. The only remedy is to have the buyer seek relief against the seller.

The seller finances the sale with a contract in which the buyer agrees to pay for the property in installments over a set timeframe. The seller (also known as a vendor) has the title, along with all ownership benefits, until the buyer (also known as the vendee) meets all the contract terms.

Numerous states, including California, use the Contract of Sale and nonprofit lenders to fully utilize this form of title transfer, promoting homeownership for low- to moderate-income homeowners.

Contract for Deed Tips

When considering a contract for deed, think about these facts:

  • Contract-for-deed terms. Homeowners can offer the buyer a personal loan by using the house's equity. The terms of the contract-for-deed agreements change with each owner and buyer, but the homeowner usually asks for a contract and down payment. The terms typically include a monthly payment, interest payments, and property taxes.
  • Liens. The homeowner has the grant deed that shows homeownership. This lets the homeowner use equity to take out other loans. Potential liens include a second mortgage or one for construction work.
  • Down payment and foreclosure. If the homeowner dies, and his or her family takes over the agreement, some states prevent new contract-for-deed buyers. The new buyers must go to court to enforce the original contract.
  • Contract cancellations. Contract-for-deed agreements don't let the buyer sell the home, pay off the loan back, and then purchase a new residence. Instead, the agreement only transfers the ownership deed once the buyer finishes making payments. Some contracts let the seller keep interest payments made up to the cancellation date as a penalty for not completing the sale.

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