10 Benefits of Selling 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 seller receives many benefits from selling on a contract for deed (CD). Some of these benefits include:
1) Large pool of buyers
Since the seller is offering financing, they are able to generate a large pool of buyers who are unable to qualify for traditional financing - usually due to poor credit. However, these buyers may still have available cash for a down payment and a stable income. In essence, the seller is not merely marketing a house for sale, but financing as well.
2) Quick sale
Since the pool of buyers is large, sellers are often able to sell their properties quickly. Furthermore, since a lender is not involved, the typical delays from a loan application process will not hold up the closing. For this reason, a typical contract for deed closing can occur within a few days of finding a buyer.
3) Higher sales price
Since the buyer is unable to obtain financing through traditional sources, the seller is often able to sell their property for more than market value. Buyers also tend to be more concerned about the affordability of the monthly payments than the actual purchase price.
4) Higher payment
A seller collects principal and interest payments, which usually exceeds the amount of rent a seller would normally receive from the property.
5) Higher Return
A seller may not need the entire proceeds from a sale today. Instead, they may prefer to receive steady payments over time. When these payments are received over time, a seller is able to earn a return on their investment which is often higher than most other available investments. Sellers also avoid the high taxes incurred on a traditional sale and the transaction is instead treated as an installment sale.
6) Minimal closing costs
A seller avoids many of the typical closing costs such as Realtor commissions. This alone can save them as much as 6-7% of the purchase price. Other closing costs such as appraisal fees, inspection fees, points, credit report fees, title insurance, and other lender-related fees can also be avoided. While lender fees are often the responsibility of the buyer, the seller is often asked to pay for them by buyers in traditional sales.
7) No bank delays
Since a traditional lender is not involved, typical bank delays are avoided. This means no more hoops to jump through or requests for additional documentation to hold up the sale.
8) Buyer is responsible for repairs
The buyer assumes responsibility for making repairs. In addition, buyers also elect to make upgrades, effectively increasing the value of the property.
9) Buyer pays property taxes and insurance
The buyer assumes responsibility for the property taxes and insurance. The IRS also expects the buyer to pay for these items to validate the sale and it determines whether the buyer is the true owner for tax purposes. When a buyer is the true owner, they may claim the interest expense deduction.
10) Easy cancellation
A seller may cancel a contract for deed with relative ease if a buyer defaults. The cancellation process is much less expensive and less trouble than a foreclosure. In fact, in some states it may actually be easier than an eviction. State laws regarding cancellation vary and may include a redemption period. It’s important to check your state laws regarding how cancellations are handled.