Contract for Deeds
If you want to purchase real estate but cannot secure financing through a bank, you may consider a contract for deed, also known as an installment land contract. But before using a land contract to buy or sell real estate, you must understand that they are considerably less regulated than traditional financing options. There are important rules and regulations you must follow.
To protect yourself and avoid the pitfalls that can come with buying or selling property through a land contract, you should work with an experienced real estate attorney to protect your legal rights.
What Is a Contract for Deed?
A contract for deed is an agreement between a buyer and seller to purchase and sell real estate. The buyer agrees to buy the property and will take possession but will not receive legal title until the debt has been satisfied. This is a form of seller financing that occurs outside of a traditional mortgage. It allows the buyer to purchase a home, vacant lot, commercial property, farm, or other real estate.
If the buyer does not meet their obligations, the seller can recover possession of the property and keeps the money that the buyer already paid. To be enforceable, a contract for deed must be in writing. If the buyer fails to meet their obligations, the seller can, among other things, cancel the contract, recover possession, and keep any payments made by the buyer. If the seller fails to meet their obligations, the buyer can sue for specific performance, damages, or restitution.
Contract for Deed vs. Traditional Financing
A contract for deed is often used when the buyer is unwilling or unable to obtain a traditional mortgage. Typically, it will grant the buyer immediate possession of the property, while legal title to the property remains with the seller. Once the buyer has satisfied their obligations under the contract, the seller transfers title to the buyer.
There are no standardized forms for a contract for deed, which means every agreement can be slightly different. This affords the buyer and seller additional flexibility; however, the parties must ensure their rights are being protected. Because a land contract is essentially seller-financed, these agreements offer fewer protections, especially for buyers.
Disadvantages of a Contract for Deed
Because the buyer is seeking financing outside of a traditional bank, the seller can set their own requirements. As a result, there are several factors to consider if you plan to use a contract for deed to buy or sell real estate.
- The seller can set their own terms for the buyer’s creditworthiness, the amount of the down payment, and other terms that a bank might usually dictate.
- Will the buyer be able to afford the down payment?
- How much can the buyer afford in monthly payments?
- What legal recourse will the buyer have if the seller defaults?
- If the seller has a mortgage on the property, will the land contract present any legal issues between the seller and the seller’s lender?
- Will the contract for deed generate the required financial return?
- How to assess the buyer’s creditworthiness?
- Is the seller ready to take on the role of a lender?
- Who will be responsible for upkeep, maintenance, taxes, and insurance?
- Does the seller have a plan for accurately keeping records of payments from the buyer?
- How will the seller enforce the terms of the contract in the event of a breach?
- If the seller has a mortgage, how will selling under a contract for deed impact the agreement with the lender?
Buyer and Seller Protections in a Land Contract
Hiring an attorney to prepare a contract for deed will ensure that the contract contains terms that protect the buyer or seller. To be enforceable, the agreement must be in writing, and must satisfy general contract principles, including offer, acceptance, consideration, and competency.
A contract for deed should also:
- Address payment terms;
- Grant possession of the property to the buyer during the term of the contract;
- Require that the buyer purchase title insurance on the property;
- Address payment of property taxes;
- Require that seller deliver a warranty deed upon the buyer’s performance of the contract;
- Require that the seller pay transfer taxes when delivering the deed to the buyer;
- Cover questions of liability and casualty insurance;
- Specify whether the buyer can transfer his interest in the land without prior consent of the seller;
- Require that the buyer maintain the property in good condition;
- Specify whether the buyer can make substantial changes to the property without prior consent of the seller;
- Address whether the seller can place a mortgage on the property;
- Identify the legal remedies for both parties in the event of a default.
What Happens in Cases of Default?
If the buyer or seller fails to uphold their end of the contract, it is often best to address these concerns as they arise. But if the parties cannot reach an agreement, it may be necessary for the buyer or seller to file a lawsuit. If either side has breached the terms of the contract for deed, begin by looking at the terms of the agreement to determine what remedies may be available.
If the buyer has breached the terms of the contract, the seller generally has several options:
- Sue for breach of contract;
- Sue for cancellation of the land contract;;
- Depending upon the state’s law, utilizing statutory procedures for cancellation of the land contract;
- Forfeiture; or
Following cancellation of the land contract by statutory process or legal action, sometimes an eviction action is necessary to obtain possession of the real estate.
Once the buyer has satisfied their contractual obligations, the seller should give the buyer the deed to the property. If the seller breaches the terms of the agreement, the buyer can:
- Sue for specific performance;
- Quiet title;
- Cancel the land contract and seek return of the money paid;
- Seek money damages.
Contact Our Fremstad Law Real Estate Attorneys Today
If you are considering using a contract for deed to finance the purchase and sale of real estate, you must address certain unique risks and considerations. To ensure that your land contract is enforceable and offers protection when you need it, contact the real estate attorneys at Fremstad Law. During a confidential consultation, we will discuss your situation and how we can help move you forward.