In a contract for deed, the seller finances the purchase of property rather than a third-party lender such as a commercial bank or credit union. The arrangement can benefit Buyers and Sellers by extending credit to homebuyers who would not otherwise qualify for a loan. Indeed, public and nonprofit housing advocacy organizations have used the Contract for Deed as a tool to help low and moderate-income households attain homeownership.
Nonetheless, this alternative financing mechanism lacks many of the protections afforded borrowers who have traditional mortgages. As a Real Estate Broker, Turn-Key Properties, LLC handles these transactions with great success for everyone! Yes, the contract is weighted with protections for the Seller, because the Buyer is risky, but if the Buyer makes their payments on time, they will own the house in the specified time-frame. When loaning money to a risky Buyer, the Seller wants all the protections possible.
The following article presents basic facts and features of the Contract for Deed and offers suggestions for minimizing the risks associated with this mortgage substitute.
A 'land contract' (sometimes known as a “contract for deed” or an “installment sale agreement”) is a contract between a seller and buyer of real property in which the seller provides financing to buy the property for an agreed-upon purchase price and the buyer repays the loan in installments. Under a land contract, the seller retains the legal title to the property, while permitting the buyer to take possession of it for most purposes other than legal ownership. The sale price is typically paid in periodic installments, often with a balloon payment at the end to make the time length of payments shorter than a corresponding fully amortized loan without a final balloon payment. When the full purchase price has been paid including any interest, the seller is obligated to convey legal title to the property to the buyer. An initial down payment from the buyer to the seller is usually also required by a land contract. The legal status of land contracts varies from region to region.
ADVANTAGES FOR THE SELLER:
- The property will not pass lenders inspection: Say your property has issues that will prevent it from being financed with a conventional mortgage. Most common are foundation issues, termites, electrical or plumbing problems. It’s still a good house, it just won’t pass the strict lender’s requirement and the issues are ones that the Buyer can repair themselves. If the Contract for Deed is for the full purchase price and NO Balloon payment, this is not a problem. When the Contract has been paid, there is no need for additional financing, as with a Balloon payment. This can be a plus for both the Seller and the Buyer.
- Value is not set by an appraisal: Most often these types of deals are priced much higher than the market would bare in a normal real estate transaction. Since this method is most commonly used by buyers with poor credit and limited funds, this is a way for the Seller to get a higher price for the property and for the Buyer to become a Homeowner, when they otherwise could not do so.
- Seller does not record the transaction: These types of transactions are rarely recorded to protect the Seller. The Seller is still the legal owner of the property, until the Contract is 100% paid off. Once the Contract is paid in full, the Deed is transferred to the Buyer.
- Connection to a Lease: The Contract for Deed should be connected to an Addendum, which is a Lease, so if the Buyer defaults, all you must do is file Eviction for non-payment of “rent” and you can easily get possession of the house again. If the Contract is recorded, it is going to much more difficult to gain possession and it could be determined that the Buyer “owns” a portion of the house.
- The Buyer makes all repairs: Was one of the reasons you wanted to sell the house was to end the repair bills? Well this gets you out from under paying for repairs, plus you still have a monthly income!
- You earn Interest: The Interest percentage on the purchase price is usually fairly high, compared to the going mortgage rate, because the Buyer is risky. In addition to the purchase price, no repair costs, you also earn interest every month! The amount of interest is going to be much higher than you can earn on your money almost anywhere else!
- Taxes and Insurance: In addition to the monthly payment, the Buyer pays the Seller for Property Taxes and Insurance. The Seller continues to keep the property Insurance in their name, to make sure the Insurance cost is paid and coverage does not lapse. The Seller also continues to pay the Real Estate taxes for the same reason. We divide the Insurance and Property Tax cost by 12 months and add that onto the mortgage payment amount.
- Great value income: When the Contract is fulfilled, you have likely collected far more than the place was worth.
Turn-Key has one Buyer/Tenant who just has a few more payments to make and in 2017, the house will be paid for. Over the years of the Contract, the Buyer has made every payment on time. The Buyer will soon be a full-fledged Homeowner! The Seller has had constant income for years, with NO maintenance costs!
Keep in mind….You cannot legally convey a title to a property you do not own outright!
In other words, you can't sell what you do not own, if you have a mortgage on the property you cannot legally sell it to another party, without the consent of the lender or by paying off the mortgage!
Once the Contract for Deed and attached Addendum/Lease are signed, collecting the payments can proceed in two ways.
- You can pay Turn-Key a commission on the sale and collect the payments yourself.
- The option that every one of our Sellers have chosen is for Turn-Key to continue to be the Kansas City Property Manager for the property, collecting rent and overseeing the transaction to completion. The same Management Fees apply as with a normal rental property.
PITFALLS FOR THE SELLER:
- Especially, if there is a Balloon payment written in the Contract, the sale may fall through when the Balloon payment comes due. The likelihood of the Buyer cleaning up their credit and qualifying for a conventional mortgage by this date are very slim! The Buyer might just trash the property when they find out they cannot qualify for the loan at the time the balloon payment comes due. Then you get back a trashed house and have to make repairs and start over.
ADVANTAGES FOR THE BUYER:
- You get to tell your friends you bought a house!
- You get to do most of the decorating, maintenance and repairs that suit you! You are free to paint the walls your favorite color, add that backsplash in the kitchen you always wanted, replace that faucet with the shiny one you have your eye on!
- You have the opportunity to become a Homeowner at an affordable price, without spending thousands to clean up your credit first.
- This is a way for you to build credit!
Does this sound like a fit for your property? Call Turn-Key today and let us advertise your property and get a Buyer in there right away!