Contract for Deed Information
A Contract for Deed is also known as:
What is a Contract for Deed?
A Contract for Deed (or Land Contract) is a contract for the purchase of real property (real estate) in which the seller retains the deed (title) to the property until the purchaser makes payments in installments equal to the agreed upon purchase price. The purchaser has an immediate right to possession of the property, but the seller defers delivery of the deed (transfer of title) until he or she has secured all or part of the purchase price.
The land contract is generally used when a buyer is unable to obtain financing through traditional methods and instead makes monthly payments to the seller.
What is in a Contract for Deed?
A Contract for Deed includes information about the seller and buyer, the property, the price, and the payment plan.
It also encompasses more detailed information about the property insurance, property tax, loan interest calculation, late payment penalties and default protocols.
When You Should Use a Contract for Deed
If you are transacting a real estate purchase where the seller is providing financing, you should use a Contract for Deed. Generally, the purchaser will be repaying the loan to the seller through monthly installments.
A Contract for Deed is commonly used when a buyer is unable to obtain financing from a traditional lender due to poor credit rating, insufficient collateral or down payment, changed employment situation, sporadic employment history, or a high personal debt to income ratio.
How do I Determine Payments?
The monthly payment required on a Contract for Deed is usually similar to that of a mortgage payment, meaning that a portion of the installment will go towards the repayment of the principal, and the other portion will go towards the repayment of the interest owed.
One way to determine a fair interest rate and to calculate the payments is to contact local financial institutions or mortgage brokers to find out current industry standard rate that are charged by lenders.
Purchaser's Default on a Land Contract
A purchase default is what ensures that the buyer will not violate the terms of the contract. General purchase defaults can include:
If the purchaser is late in making a payment, the purchaser has a notice period to remedy the default. During this period, he or she will be subject to a late fee, the amount of which is decided in the agreement.
When the purchaser fails to remedy a default, he or she will only have a limited time to pay off the remaining balance of the purchase price. He or she will also be required to vacate the property within the timeframe agreed upon in the contract.
The seller has a right to reinstate this agreement if the purchaser can cure the defaults that have occurred. However, this right is at the sole discretion of the seller. Because of this, it is important the parties agree to feasible repayment terms so the purchaser will be less likely to default under this agreement.
Responsibilities in a Contract for Deed
In a Contract for Deed, both the seller and the buyer have responsibilities when it comes to the property. Unlike a lender financed mortgage, the seller retains the property deed until the purchase price has been paid in full.
Because of this, each party has different obligations in terms of insurance and property tax.
In most cases, the seller will be responsible for insurance on all of his or her personal items that remain on the property prior to the buyer receiving the deed.
The purchaser will be responsible for insurance for his or her personal items, the property itself, as well as liability insurance.
Usually, the purchaser takes over property tax payments from the seller.