Deed Contract Agreement: Everything You Need to Know
Deed contract agreement, also known as contract for deed, is a financing option for buyers who wish to purchase property but can't obtain traditional mortgages.3 min read
A deed contract agreement, also known as a contract for deed, is a financing option for buyers who wish to purchase property but can't obtain traditional mortgages.
What Is a Contract for Deed?
Other names for a contract for deed include the following:
- Land sale contract
- Land contract
- Contract to sell real estate
- Real property purchase agreement
- Real property sales agreement
A buyer may have one of the following issues that make it impossible to obtain financing from a traditional lender:
- Poor credit
- Insufficient down payment
- Insufficient collateral
- Sporadic employment history
- Change in an employment situation
- High debt-to-income ratio
As a result, he may enter into a contract for deed. In this agreement, a seller finances a property's purchase in much the same way that a mortgage company would.
If the buyer defaults on payments, the seller is able to repossess the property. The buyer holds an equitable title, while the seller has the legal title. Unless other agreements are in place, the equitable title provides the buyer with almost the same privileges he would hold as an owner.
Some states require a seller who repossesses a property to reimburse the buyer for the fair value of home improvements, along with a reasonable amount for rent. The seller gives the deed to the buyer when the buyer pays off the total sale price.
Compared to a traditional mortgage, contract deeds can be risky financial agreements. However, it's possible for homebuyers and homeowners to benefit from these types of agreements, depending on several factors. In many states, contracts for deeds are not just valid options; they're the primary option for seller financing.
Usually, the process begins as a negotiation between a buyer and seller. Stock and boilerplate terms generally cannot apply, and there is increased flexibility in the process.
The contract for a deed's length is typically five years, but the buyer and seller may agree on another timeframe. A contract for deed has no regulated interest rates; the rate is whatever the buyer and seller agree on.
Payments may be structured in a way both parties agree to. Sometimes, the value of the property is divided into equal payments, ensuring that the balance is paid off at the end of the term. In other cases, the buyer makes regular payments and then pays the balance in a balloon payment at the end.
As long as both sides are open to it, these agreements can be renegotiated.
What's Included in a Contract for Deed?
The following should be in a contract for deed:
- Purchase price
- Interest rate
- Down payment
- Number of monthly installments
- Buyer and seller information
- Party responsibilities
- Legal remedies in the event of default
Include the property's address and a description of it. You can find the legal description on the title or deed, or you can obtain it from the property tax office. Include each party's full legal name and contact information. Specify the state laws that apply if the buyer and seller live in different jurisdictions.
Outline a payment schedule and how payments are to be made. In addition to monthly payments, specify if the buyer pays a final lump sum or balloon payment. For instance, some sellers may agree to carry the loan for a set period of time but require the buyer to obtain another form of financing to buy the property outright. Include creditor and loan information if the seller has an existing loan on the property.
Usually, the buyer lives in and uses the property like he's the owner, meaning he's also responsible for maintenance. If the seller is supposed to make certain repairs, list them in the contract, along with the expected completion dates.
Specify the responsible party for insurance covering fire, flood, and personal property. Also, decide who's responsible for paying property taxes and assessments.
Not everyone will qualify for a conventional mortgage loan, for any number of reasons. A deed contract agreement gives such buyers a chance to purchase and eventually own a home. As with any contract, make sure you fully understand all of the terms and conditions. Consult a legal professional if you have any questions or concerns about a contract.
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