We get many questions about contracts for deed and some people assume they are not as “good” as a traditional bank loan and mortgage. As with most legal issues, there are several issues or factors if comparing contract for deeds and mortgages.
For sellers, many clients love earning a good interest rate on the sales price. If they were just paid in full at closing, sellers now must decide where to place the net proceeds. Some are wary of the stock market and bank interest rates are at historic lows. Another potential advantage with a contract is that a seller may elect to spread any capital gains tax over the life of the contract rather than reporting all in the year of sale. If a buyer defaults, the seller simply gives a 60 day notice to cure and if they fail to do so, the seller is back in title and is able to keep all past payments. The one caution here is that your buyer may leave the house in worse condition that when they took possession. Because of that risk, it’s best to demand a substantial down payment so there are funds to cover that risk.
For buyers, if you can qualify for a traditional 30 year mortgage you normally get a better interest rate than with a contract for deed. However, closing costs are higher to complete traditional bank financing. A buyer just has to compare and contrast both options and also confirm that the seller is open to either option. On the other hand, if you have poor credit, a buyer’s only choice may be a contract for deed.
With either option, make sure that your loan and title documents are properly recorded. You also want to confirm the priority of any new mortgage or contract with any other outstanding liens. We do see a fair number of contract for deeds that are not recorded and therefore a buyer’s rights are suspect at best.
Please send any request for topic suggestions to email@example.com. Although we cannot give you legal advice through the column, we can provide some general information that may be helpful for you to know. Our purpose is to educate and we hope that you can take something new away from this column each time you read it.