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LEGAL DICTIONARY

Contract for Deed

What Is a Contract for Deed?

A contract for deed is a real estate contract between a buyer and seller that includes an installment sale agreement with no third-party lender involved. A transaction involving a contract for deed stipulates that the buyer will make payments to the seller over time. The seller will retain the property title until all payments are made.

Also called a bond for deed, installment purchase contract, or land sales contract, a contract for deed typically includes an initial down payment and interest charges. When all payments have been made, the seller is required to convey the property title to the buyer. The transaction then must be recorded in the county’s register of deeds.

When Is a Contract for Deed a Good Idea?

Since it is a private arrangement, a contract for deed offers both the buyer and the seller some flexibility in setting the terms of the real estate transaction. Here are some of the situations when using a contract for deed makes sense.

  • Avoiding traditional lenders. This legal arrangement appeals to buyers who cannot secure a conventional mortgage due to a lack of down payment funds, poor credit, and insufficient credit. The seller might require a higher interest rate than the current standard rate. Or they might offer a lower interest rate.
  • Saving money on fees. Contract for deed transactions do not come with many of the costs associated with a traditional loan. If a real estate broker is not involved, closing costs may also be lower.
  • Speeding up the process. Buyer and seller can communicate and settle on contract terms directly without having to work around the schedules of lenders and brokers before closing. This arrangement appeals to buyers and sellers who know each other well, such as family members or close friends.

What Are Some Potential Drawbacks of a Contract for Deed?

Although there are some advantages to a contract for deed, it may not be the best choice for all real estate transactions. Here are some factors to consider.

Warranty deed vs. quitclaim deed. The different types of real estate deeds are based on the kind of warranties the seller grants the buyer. In a general warranty deed, the seller guarantees that the property is clear of any title defects. On the other hand, a quitclaim deed (such as a contract for deed) offers no such protection.

As-Is Condition. Many steps that apply to a traditional property purchase or land contract do not apply to a contract for deed. For example, the agreement may not include a home appraisal or inspection by a qualified property appraiser. The buyer needs to fully understand the property’s condition before signing the contract.

Deed vs. Title. Also, although the buyer may take possession of the property after signing a contract for deed, they do not own the property until they have made all payments. As a result, the buyer has no legal claim to the property until all contract terms are met. Therefore, if a buyer misses any payments, the seller has no legal obligation to initiate the foreclosure process.

Balloon payments. Another possible drawback is that many of these contracts include a higher payment amount near the end of the installment period. The buyer needs to be prepared for these so-called balloon payments.

Property laws can vary in each state. Therefore, it is crucial to be familiar with your local rules before entering into a contract for deed or any other real estate agreement.

Helpful Resources:

Bankrate - What Is A Contract For Deed?
Cornell Law - Contract for Deed
NPR - Why contract for deed arrangements can be risky for homebuyers
SFGate - The Disadvantages of a Contract for Deed

What Is a Contract for Deed?

A contract for deed is a real estate contract between a buyer and seller that includes an installment sale agreement with no third-party lender involved. A transaction involving a contract for deed stipulates that the buyer will make payments to the seller over time. The seller will retain the property title until all payments are made.

Also called a bond for deed, installment purchase contract, or land sales contract, a contract for deed typically includes an initial down payment and interest charges. When all payments have been made, the seller is required to convey the property title to the buyer. The transaction then must be recorded in the county’s register of deeds.

When Is a Contract for Deed a Good Idea?

Since it is a private arrangement, a contract for deed offers both the buyer and the seller some flexibility in setting the terms of the real estate transaction. Here are some of the situations when using a contract for deed makes sense.

  • Avoiding traditional lenders. This legal arrangement appeals to buyers who cannot secure a conventional mortgage due to a lack of down payment funds, poor credit, and insufficient credit. The seller might require a higher interest rate than the current standard rate. Or they might offer a lower interest rate.
  • Saving money on fees. Contract for deed transactions do not come with many of the costs associated with a traditional loan. If a real estate broker is not involved, closing costs may also be lower.
  • Speeding up the process. Buyer and seller can communicate and settle on contract terms directly without having to work around the schedules of lenders and brokers before closing. This arrangement appeals to buyers and sellers who know each other well, such as family members or close friends.

What Are Some Potential Drawbacks of a Contract for Deed?

Although there are some advantages to a contract for deed, it may not be the best choice for all real estate transactions. Here are some factors to consider.

Warranty deed vs. quitclaim deed. The different types of real estate deeds are based on the kind of warranties the seller grants the buyer. In a general warranty deed, the seller guarantees that the property is clear of any title defects. On the other hand, a quitclaim deed (such as a contract for deed) offers no such protection.

As-Is Condition. Many steps that apply to a traditional property purchase or land contract do not apply to a contract for deed. For example, the agreement may not include a home appraisal or inspection by a qualified property appraiser. The buyer needs to fully understand the property’s condition before signing the contract.

Deed vs. Title. Also, although the buyer may take possession of the property after signing a contract for deed, they do not own the property until they have made all payments. As a result, the buyer has no legal claim to the property until all contract terms are met. Therefore, if a buyer misses any payments, the seller has no legal obligation to initiate the foreclosure process.

Balloon payments. Another possible drawback is that many of these contracts include a higher payment amount near the end of the installment period. The buyer needs to be prepared for these so-called balloon payments.

Property laws can vary in each state. Therefore, it is crucial to be familiar with your local rules before entering into a contract for deed or any other real estate agreement.

Helpful Resources:

Bankrate - What Is A Contract For Deed?
Cornell Law - Contract for Deed
NPR - Why contract for deed arrangements can be risky for homebuyers
SFGate - The Disadvantages of a Contract for Deed