A Contract For Deed is a form of seller financing option for land. Also referred to as a land contract, or as an installment sale agreement, these agreements represent a direct contract between the buyer and seller.
Though this allows for greater financial flexibility in land purchases, it can also be a greater risk to both the buyer and the seller. Land contracts work great for buyers who may not yet qualify for appropriate financing or sellers who are eager to move a property.
The fundamental rule of a contract for deed is that the deed is not handed over until the agreed payback amount has been fulfilled.
However, most land contracts include clauses that allow the buyer to build upon and utilize the land until such time. This allows for a buyer to purchase and use land before the deed is "in hand", so to speak. As a result, a contract for deed typically has a shorter term than a mortgage. Though a payment schedule may be based off of a 15-30 year amortization, a balloon payment (also known as a 'bullet payment') after 5-10 years is usually required by the terms of the contact. This payment allows the buyer to pay off or refinance the loan early and minimize the financial burden on the seller.
Such balloon payment arrangements carry a degree of risk. Both the buyer and the seller are depending on the buyers ability to finance the balloon payment through a financial institution at the time of the land contract's maturity. If this cannot be achieved, the seller must foreclose on the contract or wait longer for a bullet payment.
Due to the shaky nature of such an arrangement - for both the buyer and the seller - it is very important that a lawyer or similar professional be brought in to create a secure land contract. If the seller is carrying the financing themselves, it will be important to address a variety of vital issues.
A background check will be essential for a seller. A buyer should be cognizant of any outstanding settlements or collections against them, as a seller will seek to obtain title insurance. Title insurance requires that the buyer have no liens or judgments against them at the time of the contract signing.
If the seller is carrying the loan on hunting land, versus financing the contract themselves, a late-payment may be stipulated. In such an arrangement, the amortized payments essentially pass from the vendee, through the vendor and on to a financial institution. Any late payment and delinquency fees will be assessed of the seller, and not the buyer. It is therefore important that the seller's mitigate these risks and that the buyer agree to these terms.
Insurance in a contract for deed scenario is touchy. A typical mortgage has the owner purchasing a home owners' insurance policy in the event of catastrophe. In a land contract, the insurance should be the burden of the buyer; however, in instances where the contractor is carrying the mortgage, insurance will be in the name of whoever carries the loan. Sellers should talk to their financial institutions about having the insurance policy in the name of the buyer.
It is also important that both parties discuss the payment of property taxes. Some sellers will seek an arrangement that amortizes the taxes into the monthly payment. Others will simply invoice the year's tax bill when it comes time, and request that amount from the buyer. The seller and the buyer should come to a mutual agreement as how the taxes will be handled during the term of the contract.
One of the disadvantages of a land contract for buyers is the process of foreclosure. Though no one wishes to foreclose, the process is considerably lengthier when dealing with a financial institution. By contrast, repossession by a land contract vendor can happen rapidly. Furthermore, money invested by the vendee will be lost upon termination of contract.
This may seem like an unfair advantage for sellers until one considers the effects of depreciation and "due-on-sale" clauses. Since buyers are allowed to utilize the land as if the title were theirs, the results of a foreclosure could potentially leave a seller with land that is worth less than what they've earned through land contract payments.
Land contracts may also violate the due-on-sale clause present in many mortgages. This clause generally states that the lending institution is due the payoff amount for a home or property at the time of its sale or transfer. Land contracts often violate this clause and give lenders the option to call in the loan on the title holder. Even a long-term lease can initiate the due-on-sale clause, leaving the seller with a potentially significant financial burden in the event contract violation.
Land contracts can be helpful to both buyers and sellers. In spite of the risks, land contracts, again - often referred to as a contract for deed, continue to grow in popularity. The ability to move real property with considerable flexibility and speed is appealing to sellers. Buyers - particularly young ones - are attracted to the opportunity to buy in spite of rejection from financial institutions. Through careful research and consideration, a land contract can achieve an outcome that is beneficial for both buyers and sellers.