Contract for deed is a type of buyer-seller agreement where the seller provides the financing of the property. The agreed upon price will be paid via installments.
Commonly, it is on a monthly basis with a term of 3 to 5 years. The terms will depend on what the buyer and seller agree on. But, generally, the terms are more convenient or flexible than those of a lender.
Here are a few Contract for Deed advantages for buyers:
Because the buyer is the legal owner, he or she can claim mortgage interest deductions and real estate tax when calculating personal income taxes. Buyers, however, need to personally keep track of their payments as sellers are not required to provide a year-end statement for contracts of deeds.
This advantage depends on the seller. Typically, the seller doesn’t require a big down payment since a balloon payment will need to be paid by the end of the contract. With little to no down payment, the buyer can move in as soon as the Contract for Deed terms and conditions are finalized.
Every year, it gets harder for a loan to be approved. From the requirements to the process, it’s become more tedious and difficult. With Contract for Deed, the decision will rely on the seller. Typically, a seller will be less strict compared to a mortgage company.
Because a Contract for Deed terms are more affordable and flexible, it might be an easier path to home ownership. Even those with credit challenges can go through with a Contract for Deed.
Another advantage that buyers can be happy about with a contract for deed is homesteading. The buyer can also take advantage of certain property tax benefits such as the market value exclusion and being qualified to apply for property tax refund. Know more about this here.
Right about now, the contract for deed may seem like the best option for a buyer, but it’s always a smart move to look at not just the PROS but the the CONS as well:
Buyers should remember that if a payment has been missed, the seller has the right to reclaim the property and cancel the contract without judicial action or a foreclosure sale. This means that a buyer needs to assess whether he can afford the house or not before going into a Contract for Deed.
In most cases, the buyer will be responsible for the upkeep and maintenance of the property. This can be negotiated, but it will still depend if the seller agrees to it.
With a 60-day notice, the seller has the right to cancel the contract if the buyer is unable to get a loan at the time the balloon payment is due. It won’t matter if the buyer always pays on time, the seller has the right to take the property back without returning any other payments.
In a Contract for Deed, the seller keeps the contract. It is possible for the seller to continue burdening the property with more mortgages or liens. The best thing to do is to record the contract with the county recorder as soon as it takes effect.
The CONS just prove that the Contact for Deed shouldn’t be entered into without serious thought. For more tips on real estate, make sure to visit our blog.