A contract for deed is a legal real estate document that a buyer and seller use to outline the terms of the sale. It is most common in situations where the buyer was unable to qualify for a traditional mortgage due to poor credit, lack of credit history, insufficient income, or another factor determined by a mortgage lender. People also use a contract for deed when they desire a faster option for financing and purchasing the property.
How a Contract for Deed Works in Practice
It is up to the buyer and seller to determine the terms of the sale. Typically, the buyer makes monthly payments to the seller directly until the value of the property is paid in full or he or she finds another means to pay off the balance. The seller retains the title and legal rights to the property until all payments have been made.
The seller has the legal right to repossess the property if the buyer defaults on the payments. However, some states require the seller to reimburse the buyer a reasonable amount for rent. Other states require the seller to make payment to the buyer for the fair market value of any improvements he or she made to the house while living in it.
Negotiating Payment Amount and Interest Rate
A contract for deed begins with negotiation on the terms of the sale between buyer and seller. Although the average length of time for this type of contract is five years, it can be as long or short as the two parties desire. No government agency regulates interest rates in contract for deed transactions, so that too is up to the buyer and seller to decide.
Buyers and sellers have the freedom to structure the payments in any manner they see fit. One option is to divide the value of the house into equal payments so the deed is paid in full by the end of the term. Another is to establish regular payments with a larger balloon payment at the end. So long as both parties agree, a contract for deed is re-negotiable at any time.
Comparing a Contract for Deed to Other Types of Real Estate Deeds
A contract for deed won’t work for every type of real estate transaction. In certain situations, one of the following may be more appropriate:
Quit Claim Deed: Both this type of deed and the contract for deed are more common among relatives and people who know each other well. The quit claim deed allows one party to transfer his or her interest in a property to another party without placing it for sale. Couples who are going through a divorce and parents leaving their home to an adult child are two primary examples of when a quit claim deed might be the best option.
Warranty Deed: This type of deed is typically used in traditional real estate transactions involving a mortgage and the sale of residential or commercial property. It protects the buyer from future claims against the title such as a lien, judgment, or ownership claim by another party. The seller agrees to cover claims that may arise during any period of the history of the property. This includes while the seller owned the property as well as before he or she took ownership of it.
Special Warranty Deed: This deed type is similar to the traditional warranty deed with one major exception. The buyer’s protection against future claims on the title only covers the time that the seller owned the property. Signing a special warranty deed means that the title was free and clear at the time of the sale.
Information Needed to Create a Contract for Deed Online
The ability to create this real estate deed online makes the transaction more convenient for both parties. To begin, the seller should name the document and center it in bold type across the top. This will typically be contract for deed, although land contract is also an acceptable name. The date the contract takes effect goes here as well. The next steps that he or she needs to follow include:
List the full names of the parties to the contract followed by (Seller) or (Buyer). The complete mailing address should go in this spot also. Post office boxes are not acceptable.
Include the full legal description of the property. A street address is not sufficient because it may change in the future. This information is available on the most recent property deed or affidavit of ownership. If the seller cannot locate it, he or she can obtain it from the county recording office.
Specify whether appliances or other personal property are included in the sale price.
List any current easements against the property. The legal definition of an easement is the limited right of a third party to use the property. As an example, a neighbor may have an easement that allows him or her the right to use the driveway of the property because there is no other way to reach his or her own property.
List any encumbrances or liens against the property. These may include a loan in which another party used the property as collateral and unpaid judgments attached to the property. The full name and address of any creditors must be listed here as well. The county recorder’s office would have details about any easement, encumbrance, or lien.
List any covenants that affect the property. This refers to specific rules about what the property owner can do with the property once the contract for deed goes into effect.
Define the payment terms of the contract for deed. This should include the principle and interest amount of the monthly payment, details about consequences of late payments, and when the contract begins and ends.
Describe the obligations of the buyer and seller during the terms of the contract. A contract for deed is unique in that two parties continue to have an interest in the property. Therefore, outlining who is responsible for maintenance, property taxes, and other duties is critical to the success of the contract. It should also describe how each party can use the property. Generally, buyers in a contract for deed have the sole right to live on or possess the property. Sellers retain limited rights to allow liens to be placed against the property or use it as collateral.
List who must pay insurance on the property. This is normally the buyer, although some insurance companies require the seller to be listed as the insured.
Describe conveyance, which means how and when the buyer takes ownership of the property.
Lastly, the parties should check for additional terms required by his or her state such as right of acceleration. This gives sellers the legal right to demand full payment of the loan in case of default.
Making a Contract for Deed a Legally Binding Document
The buyer and seller should sign the document in the presence of a notary public and indicate the date near the signature. This makes it clear the contract for deed was signed after finalization and that no changes took place that would affect its terms. It does not need to be filed with the county clerk’s office, but both parties should make a physical copy for their records.