What Is a Contract for Deed?

In most cases, homes are bought by people who use mortgage lenders. This allows the residents to be classified as homeowners, while still paying a monthly mortgage. A contract for deed is a unique situation where the residents pay the seller a monthly amount until the total cost of the house is paid off. Contracts for deed aren’t always from the interest of a seller. When a contract for deed is created, it’s usually initiated by the buyer. From there, it’s a negotiation process where both parties compromise on a final price and payment plan.

Seller vs. Buyer

Before buying or selling a home, it’s important to educate yourself on different types of buying methods. The contract for deed strategy poses a lot of different pros and cons for both the buyer and seller. Let’s examine a few of these benefits and drawbacks:

Benefits

For the Buyer: If you’re a buyer with a lower financial status, a contract for deed could be your answer. This unconventional method helps a lot of buyers who don’t have the ability to take out a mortgage. Another buyer benefit comes in the way of final costs. Typically, down payments and closing costs are much lower with a contract for deed. This is mainly due to the smaller number of tasks involved in the buying process.

For the Seller: A contract for deed could be the perfect answer if you’re trying to sell your home in a location where you haven’t been able to attract a lot of prospective buyers. Contracts for deed make it easier for the buyer to get into a home faster. Another advantage for the seller comes in the form of consistent monthly cash flow. The average contract for deed lasts five years, which is a total of 60 months where the seller will receive mailbox money. That’s hard to beat!

Drawbacks

For the Buyer: Unlike some mortgages, if a buyer misses just one payment on their contract for deed, the seller may have full power to repossess the property. While all contracts are written differently, the window to miss payments is much shorter with contracts for deed than it is with regular mortgages. Another drawback for a buyer would be the inability to up and move at moment’s notice. Sellers don’t usually have it settled in the contract that you can vacate. Not to mention, equity doesn’t really exist. Your home isn’t an investment until it’s fully paid off.

For the Seller: The main drawback to a seller would be the lower down payment. Unlike selling your home for cash, you’re not going to receive a lump sum when you decide to sell your home through a contract for deed. Another disadvantage would be the possibility of a missed payment. As if not receiving the payment is costly enough, having to take legal action for foreclosure could be even more costly.

When Should I Use a Contract for Deed?

Under the right circumstances, contracts for deed are viable options. Though some might argue it makes matters worse, a contract for deed can be the right fit for certain family members or close friends wishing to buy a house from one another. This is because both parties typically have a history and are understanding of each other’s situation.