Title Tip – Contract for Deed
When conventional financing is not an option, buyers and sellers often use a Contract for Deed sale as an alternative. Although the concept of a Contract for Deed is fairly well understood, it is important that the buyers and sellers both understand their rights and responsibilities when considering such an option. Some of the finer points that we often see missed or misunderstood are:
- Is there an existing mortgage on the property, and does the mortgage allow a sale without triggering a “due on sale” clause? (Note that frequently an existing lender would not know if you sold a property with a contract for deed. However, if they did find out they could demand payment in full on the balance of the mortgage.)
- If there IS an existing mortgage on the property, the buyer will want to make sure that the amount still owing on the contract is enough to cover the amount still owing on the mortgage. We have seen instances where the buyer is ready to pay off the contract for deed and the seller has a mortgage that is too big. Remember that the mortgage is in first lien position – which can leave the buyer owning a piece of property with a balance on the sellers mortgage that still needs to be paid off.
- What if the seller dies at this point – with no other assets to cover the amount due on the existing mortgage.
- Is the seller making the payments to the existing lender? If not, the lender can foreclose on the mortgage – and the contract for deed is in a junior lien position.
- Who takes care of taxes and insurance? And don’t forget the liability insurance in case someone gets hurt on the property.
- Can the buyer or seller “sell” their interest in the contract for deed?
- Can the buyer make improvements to the property?
- What happens if the house on the property burns down?
- Rights of the seller to cancel the contract if a payment isn’t made on time.
And there are other considerations as well. So although we see the Contract for Deed as an alternative to a mortgage, there are a number of things that make it different. Make sure your buyer or seller is aware of these differences – and the impact it might have to them. “Seek competent advice“ is great advice for both parties.
Disclaimer – this information is NOT legal or financial advice, and should not be used as a substitute for the same. It is offered for informational purposes only. Many different factors can influence the proper course of action for a particular situation. Please seek the advice of a qualified professional for guidance with your specific transaction.