Should I Use a Contract for Deed When Purchasing a Property?
A contract for deed arrangement facilitates property transfer without necessarily involving a third-party lender. Instead of a traditional lender such as a mortgage company financing the purchase price outstanding balance, a credit union, or the bank, the seller acts as the lender in a contract for deed.
How It Works
A contract for deed document details the terms of a sale. Unlike traditional financing, the title isn’t transferred to the buyer immediately. The seller will then retain the title until the agreed amount gets paid before signing a warranty deed which transfers the title to the buyer. The seller will then keep the title of the property when the buyer defaults on the payment. An agreement for deed includes:
- Any down payment needed
- The purchase price
- The interest rate
- The contract terms
- Details of what follows after a defaulted payment
What to Do Before You Sign a Contract for Deed
Get an Appraisal and an Inspection
Research the property worth you want to purchase before signing the contract. The approach is crucial as it prevents you from paying too much for the property, making it hard to secure the financing to clear the balloon payment. Prospective homebuyers can hire their appraiser and inspector or do online research for additional information regarding the value and condition of the property. Contact the city officials for any details of outstanding citations or orders on the house and secure an inspection report from the seller.
Ensure You Can Afford the Property
Individuals who purchase a property with a contract for deed need to maintain and repair it. Note the condition of vital appliances, the roof, the furnace, and the windows. Contact the city officials to assess the annual property taxes and research whether the house gets taxed as a non-homestead or homestead. Review the proposed payment terms of the seller to establish whether the insurance and property taxes get incorporated into the monthly payment.
Determine the Owner of the House
Make sure to research the person who owns the house and whether the house has a mortgage. You risk losing the property to foreclosure if the seller doesn’t own the house. Contact the city officials to establish whether there are pending assessments and other charges billed against the house and if the region requires an inspection before the house sale. Ask the county whether the seller has unpaid taxes before recording the contract to facilitate a smooth transaction.
Study the Contract for Deed
Ensure to read and understand the contract and assess whether there are charges for paying off the contract early. Review the prospective buyer’s monthly payment, insurance, taxes, and repair requirements. Make sure you review the interest rate and contact multiple banks to compare the interest rate with the conventional mortgage interest rate. Individuals with any queries regarding the contract should request their lawyer to review the terms of the deal before signing it to ensure a smooth transaction.
Benefits to the Purchaser
A contract for deed is attractive to investors who may fail to qualify for a loan. The buyer can also purchase a property using a relatively low-down payment. Contracts for deeds cost less and are faster to create compared to a deed of trust or traditional mortgages in most circumstances. Closing points, appraisal costs, application costs, and origination fees are nonexistent.
Value to the Seller
A contract for a deed may seem attractive to the seller at first glance. It’s simple to comprehend and provides a quick method for the seller to cancel the transaction when a default occurs. The contract for the deed is enforced more quickly than default on a deed of trust which takes up to six months.
A contract for deed arrangement is complete when the payment terms are fully met. The contract is often a legally binding roadmap of how the buyer and seller of a property plan to execute the sale.