Thinking of Selling on a Contract for Deed?

I recently had a friend ask me about my thoughts on selling a home on a contract for deed.  Here are some of the things we discussed:

 A contract for deed can be offered for sale through the traditional sale process using a Realtor who will upload the listing to the MLS and offer showings to buyers/agents in the normal way. It may also be done through a for-sale-by-owner method, advertising your home on sites such as Craigslist and performing the showings yourself. (If you were to use this method, I would definitely recommend using a lawyer to assist in putting together the contract.)

Upon finding a buyer, you would then agree to selling the house to the buyer on a contract basis. You would be selling what’s known as “equitable title” to the house to the buyer for an agreed upon price, while you retained what’s known as “legal title.” Instead of getting all of the money at once, you would receive a down payment up-front, and principal/interest payments on a monthly basis for the agreed upon time period until a balloon payment for the balance would become due. When the balance becomes due, presumably the buyer would obtain a traditional mortgage from a standard lender and pay off to you the remaining balance. At that time, legal title transfers to the buyer and your house is sold. If, at that time, the buyer was unable to obtain traditional financing, (depending on the terms of your contract), you could evict them and take back the house, extend the term of the contract, or begin a new contract.

The benefits of selling on a contract for deed may include the following:

You [hopefully] obtain a large down payment right away, (ideally 5 – 10%), which you’re able to keep, even if the buyer defaults on the contract and you have to repossess the property. You begin collecting money as soon as the transaction is closed, which will hopefully cover your mortgage payments until the balloon payment is due. Upon the closing of the contract, the buyer is the equitable owner of the property, and it now responsible for maintenance and repairs, unlike a rental situation, in which you’d still be on the hook for upkeep.

Some of the possible negatives of selling on a contract for deed:

If, as it appears, home prices are now on the way back up – if you sell on a contract for deed, you are selling for and eventually collectin a 2012 price, although the sale truly isn’t complete until years into the future when the property actually may have a higher value. There’s always the risk that the buyer will default or be late on payments. To repossess the house you need to go through an expedited foreclosure process, which can be halted by the buyer as soon as the payments are brought up to date. If you have a bad buyer, you could end up going through this process multiple times. You are still obligated on your original mortgage, which may affect your financial background/history in terms of credit and future financing.

Some other things to consider when selling on contract for deed:

Your current mortgage undoubtedly contains a due-on-sale clause, which could be invoked to call your mortgage balance due upon the execution of a contract for deed. Lenders are frequently willing to consent to contract-for-deed sales, but you would definitely want to obtain this consent in writing before moving forward on a contract for deed.

The only logical reason for a buyer to purchase on a contract for deed is because he/she can’t obtain traditional financing. Therefore, your buyer will, (almost by definition), have bad credit, and/or limited financial resources.

While it is ideal to collect a large down payment, many potential buyers will not have large cash reserves. This means that you may not actually find the “ideal” buyer and may need to sell without collecting a large down payment. You then end up foregoing the financial protection afforded by the down payment cash if your buyer defaults.

Since ownership transfers, you don’t have the same rights that a typical landlord has to make rules or to inspect the property to ensure that the home is being maintained properly. If the buyers ultimately don’t perform, you may end up repossessing a property that has been damaged.

 There are certainly other things to think about when considering offering your property on a contact for deed, but hopefully this discussion is a good starting point. 

If you have any other thoughts or questions on contract-for-deed financing – please comment below!