A contract for deed is generally a simpler and faster process than utilizing a mortgage lender when purchasing a property. A contract for deed is an agreement for a buyer to make payments on a property for a specified amount of time in exchange for title to the property. There are several concerns to consider when deciding whether a contract for deed is right for you.
A contract for deed may be a solution for buyers who cannot qualify for a traditional mortgage. However, for a seller, it should raise serious red flags if a buyer cannot qualify for a mortgage due to bad credit, high debt, low income, or past bankruptcy. Each of these indicates a buyer’s difficulty in making regular payments on debt.
The seller should also be concerned about liability for events on the property. The seller’s name remains on the title until the final payment on the contract, and there is a possibility of having to defend oneself if there is an injury on the property. There are also insurance concerns about the property to consider.
The buyer generally has no legal rights in the property until the final payment is made. If the buyer has difficulty in making payments, the buyer may lose the house entirely and lose whatever equity they believed they were building in the home. If the seller dies, goes bankrupt, or goes missing, the buyer’s contract may also be jeopardy.
The buyer should also consider the risk of the seller being unable or unwilling to deliver a clear title at the time of the final payment. Because the seller retains title until the final payment, the seller may still encumber the property through liens or other encumbrances. This may result in an encumbered title when it comes to the final payment, and the buyer may have no legal recourse.
Many homes sold on contract for deed are sold “as is,” which can also result in serious issues with the home later. If the buyer does not complete an inspection prior to signing a contract for deed, the buyer may be unpleasantly surprised by issues with the home.
Concerns for Both Parties
Many mortgages include a “due on sale” clause which is triggered by a contract for deed, allowing the current lender to declare the entire loan due. If the seller or buyer does not have the cash to immediately pay the lender, the property may be foreclosed on. The buyer has no rights if the home is foreclosed on because the buyer does not have any legal interest until that final payment is made.
It is highly advisable to seek an attorney’s representation if you are considering a contract for deed as either a buyer or seller. If you need assistance with a contract for deed or alternative sale arrangement, contact O’Keeffe O’Brien Lyson Foss in Fargo, North Dakota to discuss or call 701-235-8000 or 877-235-8002.