Contract for Deed Concerns
A recent article in the New York Times – How a Home Bargain Became a “Pain in the Butt,” and Worse dealt with the potential perils of contract for deeds. In this situation, and some others across the country, this type of deal became money traps for the buyer or the homes end up in disrepair.
A land contract (installment land contract or contract for deed) is financing tool whereby the seller and buyer agree upon the sale of a property under installment payments. They buyer pays the seller directly in installments rather than obtaining a mortgage from a bank or financial institution.
There are many pros and cons to utilizing contract for deed. The arrangement can benefit buyers and sellers by extending credit to homebuyers who would not otherwise qualify for a loan. The contract happens faster and is often less costly. The buyer can immediately occupy but the owner can quickly seize the property (without a foreclosure sale or judicial action) if the buyer defaults or they can utilize Right of Cancellation (Florida Title XXXIII Regulations of Trade, Commerce, Investments and Solicitations, Section 498.028). This alternative financing however often lacks many of the protections afforded to traditional mortgage holder. Some of the cons can include:
- The purchase price may exceed value of the home
- Entering into a contract may trigger a mortgage default
- The seller could refrain from deeding the property over once final payment has been made
- The seller could die before the final payment and obtaining the deed may be difficult
- The seller could fail to pay his lender
- The seller of a contract for deed can sell the rights to a property to a third party while the buyer is making payments but must notify via notarized notice that deed has been reassigned to another party.
- The buyer may fail to secure the proper insurance
- The buyer may fail to pay the necessary taxes
- May states do not record transaction, so it becomes difficult to determine who owns the property (title issues)
- Limited legal protections to buyers
Some states, financial institutions, and the Uniform Law Commission have called for better laws and better recording of Contract Deeds.
Check with your State’s laws before proceeding with a Contract for Deed. Also, due to the above and other potential issues in a land contract, it is strongly recommended that both sellers and buyers hire an experienced real estate attorney to draft and implement the contract in order to protect their rights.