How Does A Contract For Deed Work?

You might be looking at this title and wondering just what a contract for deed means. After all, it’s not a property title transfer option that’s used as often as a warranty deed or a quit claim deed.

But when it is used, this legal document, which states the terms of a sale agreement between a buyer and seller, can offer for certain people a path to property ownership that wouldn’t happen otherwise.

Such situations include:

  • Lack of credit.
  • Bad credit.
  • Insufficient income.
  • Any other reason why a traditional mortgage might be denied.

Also, those who want or need a faster way of financing a home or property, can go the route of a contract for deed.

Because this is a direct transaction between buyer and seller, both parties work out the terms of the sale. Typically, the buyer makes monthly payments directly to the seller until the property is fully paid for, or until the buyer finds another way to pay the balance due in full. Regardless, the seller retains the property title until payments are fully completed and the balance paid off.

If the buyer defaults on the payment or other terms of the agreement, the seller may have the right to repossess the property. In some states, however, sellers are required to reimburse the buyer for rent, and in other places, sellers have to pay the buyer the full market value of any additions or renovations they made to the property while they were living in it. It’s always a good idea to research your local jurisdiction’s laws when engaging in a contract for deed agreement.

Contract for Deed Advantages

There are certain advantages for having such an agreement between buyer and seller, as they can make the payment plan as long or as short as they want or need it to be, though the average term is five years. Also, the parties involved may negotiate a reasonable interest rate that can be applied to the agreement.

Another advantage to the contract for deed is that because the sale is direct, the payment schedule can be as flexible or structured as it needs to be. One common option is to have a lower monthly payment plan with a larger “balloon” payment at the end. As long as both parties are in agreement, the contract can always be re-negotiated.

What Is Needed To File a Contract for Deed?

Being able to create a contract for deed online is convenient for everyone concerned and eliminates the need for costly attorneys to draw up this particular paperwork.

Because a contract for deed situation is unique, it stands to reason that each agreement is going to be unique. This said, you’re going to need to include:

  • Legal description of the property. This does not necessarily mean the street address. The address could change in the future, such as a street being renamed. Also, like any other deed, names and mailing addresses (not PO boxes) need to be included.
  • Information concerning whether certain items, such as appliances, are included in the sale price.
  • Easements against the property. An easement is simply a limited right of a third party to use a particular part of the property, such as the use of a driveway if another person has to use it to get to their own property.
  • Liens or encumbrances. These usually include any use of the property as collateral, or there are unpaid judgements. Names and addresses of creditors should be included.
  • Covenants affecting the property. Covenants are usually rules about what the property owner can do with the property once the contract takes effect.
  • Definition of payment terms. This includes the principal and interest amount of the monthly payment, details concerning consequences of late payments, as well as the start and end dates of the contract.
  • Obligation descriptions for buyer and seller. These detail what the buyer’s obligations are and what the seller’s are.
  • Listing who must pay insurance and utilities on the property.
  • Conveyance description. This defines when and how the buyer will take full ownership of the property.

Once these details are defined, it’s time to involve a notary. The buyer and seller should both sign the contract for deed in front of a notary public. A contract for deed doesn’t need to be filed with the county clerk, but each party should make a copy for their records. 

If you’re looking to buy a property, but your credit isn’t strong or if you have insufficient income, then a contract for deed might the right arrangement.