10 Benefits of Buying on a Contract for Deed
by Alex Everest
A contract for deed (aka land contract) is a method of selling a property in which the seller finances some portion of the purchase price. The buyer typically provides a down payment and makes installment payments directly to the seller for an agreed period of time. The length of a contract for deed varies but a 2-5 year period is most common, after which a “balloon payment” for the remainder of the balance is due. The payments are usually determined by using an amortization period of 30 years.
In a contract for deed, the seller retains “legal title” while the buyer gains “equitable title.” This means that while the buyer does not get a deed, they do have an interest in the property. The seller holds onto the deed until the buyer performs all of the obligations of the contract. If the buyer performs all of the obligations, the seller is required to convey a deed to the buyer. If the buyer does not perform all of the obligations under the contract, then the seller may cancel the contract and retain all payments made. When the contract is cancelled, the buyer loses their equity, down payment, and monthly payments. A buyer who has performed all of their obligations up to the maturity of the contract, may also elect not to purchase the property. However, they would forfeit their investment.
A buyerreceives many benefits from buying on a contract for deed (CD). Some of these benefits include:
1) Home ownership
Buyers achieve the American dream of owning their own home.
2) Easy qualifying
It is much easier for buyers to qualify for a CD than a traditional mortgage. Banks traditionally require good credit and a proven history of stable monthly income. If a buyer works on commission, runs their own business, or has less than predictable income for some other reason, obtaining traditional financing will prove challenging. Furthermore, if a buyer is experiencing (orhas experienced) a bankruptcy, divorce, foreclosure, or other adverse financial situation, then they will have a difficult time qualifying for traditional financing. Sellers who sell their homes on a CD understand that a buyer is unlikely to have perfect credit and stable income. For this reason, sellers are uniquely positioned to offer financing for this type of buyer.
3) Principal reduction
CD payments are structured similar to a mortgage. As such, when the buyer pays the seller their monthly payment (containing principal and interest) the principal amount gradually decreases over time.
4) No lender fees
When a buyer obtains financing from a traditional lender, the lender will charge unnecessary fees - more commonly known as "junk fees." These fees may include; points, origination fees, appraisal fees, credit report fees, document prep fees, administration fees, a lender's title policy, and more. When buying on a CD, the buyer avoids these fees.
5) Quick closing
Since the buyer and seller are not depending on a lender to fund the transaction, they avoid the typical delays that hold up a closing. The lender may commonly ask for additional documentation, a second appraisal, repairs to the property, and require the parties to use a particular title company. In a CD situation, the buyer and seller may handle the transaction as they see fit.
6) Tax benefits of ownership
The buyer obtains the tax benefits of home ownership since the IRS treats the buyer as the true owner for tax purposes. This allows the buyer to deduct the interest paid on their tax return.
7) Right to improve the property
The buyer may improve the property to their liking. They can perform cosmetic finishing touches, finish a basement, add new windows, or build a new patio or deck.
8) Opportunity to improve credit
A CD gives a buyer the opportunity to improve their credit while they live in the home. This gives them a chance to qualify for a traditional refinance or purchase loan in the future.
9) Right to pre-pay
It is common for a seller to allow a buyer to pre-pay the CD at any time without penalty.
10) Property may increase in value
The buyer benefits from any appreciation on the property.