Benefits of a Contract for Deed

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During the last recession, many people were forced into foreclosure. A foreclosure stays on your credit report for a minimum of seven years and six months. If you filed for bankruptcy during the time your home was in foreclosure, that bankruptcy could stay on your credit report for up to 10 years. Since lenders have become very skeptical of lending to anyone with past foreclosures, short sales or bankruptcies, debtors are often forced to rent, unless they can afford a mortgage with a high interest rate, or they find alternative financing.

Contract for Deed

One method of alternative financing is a contract for deed. When you use a contract for deed, the seller becomes the lender. This is often a good solution to someone who is having a hard time selling their home and for the person or family who cannot get financing.

A contract for deed uses the existing loan to make a loan to the buyer. If you, as the seller, have a loan with 3.5 percent interest, you could offer the buyer a loan at 6 percent. The buyer pays you and then you use that payment to pay your loan.

The seller should set up a joint account for the buyer to deposit the money. The seller then transfers the money to the loan company. In this transaction, the deed is signed, but is held in escrow until the buyer pays the seller the full amount of the purchase price. Generally, contracts for deeds last three to five years. The seller records the contract for deed in the land records at closing.

Benefits of a Contract for Deed

The buyer gets the tax benefits of owning a house and can treat the house as if they own it. Buyers may make any changes, including upgrades to the house. If the parties used a real estate agent, the agent gets their commission at closing.

The seller is a lender, not a landlord, which means that the buyer is responsible for any problems with the house. Home maintenance and repairs must be done or paid for by the buyer. The Internal Revenue Service considers a contract for deed as a sale. And, the contract for deed does not violate Virginia’s Due on Sale Clause.

When the Buyer Defaults

If the buyer does default, the seller will file an affidavit with the escrow agent. In the affidavit, the seller shows that the buyer did not make payments and that the buyer’s rights in the property should be extinguished. The buyer then has to pay liquidated damages of 10 percent, plus he or she loses all the money he already has in the property.

The seller may keep all deposits and all monies the seller paid, including money for repairs, maintenance and upgrades. If you choose to use a contract for deed, you should get a down payment of at least 20 percent. If you are able to get more, it is better, as the buyer is less likely to default, or will at least discuss their financial issues with you to work out a deal.