How to Finance a Contract for a Deed
A contract for deed is a private contract to finance the purchase of real estate (typically investment properties such as commercial real estate or apartments). Contracts for deed are a form of seller financing and typically charge a relatively high rate of interest. Under a contract for deed, the seller retains the legal ownership of the property while the buyer is granted the usage of the property.
Other People Are Reading
Instructions
-
-
1
Not all sellers of real estate are prepared to offer contracts for deed. The first part of the purchase process needs to be locating a suitable investment that offers seller financing. Many sellers do not want to take on the additional risk associated with offering seller financing so it is important to negotiate it's availability up front.
-
2
Contracts for deed will typically allow buyers to purchase property with 90- to 95-percent loan-to-value (LTV) ratios. This means the purchaser will still need to come to the closing with 5 to 10 percent cash down payment. Buyers negotiating a contract for deed will need to be prepared to make a cash down payment against the contract and understand that if they default on the contract the seller retains the legal rights to the property and to the down payment funds.
-
-
3
Contracts for deed are typically written as short term contracts and will typically require a balloon payment at the end of three to five years. In order to avoid this balloon payment the purchaser should plan on securing a traditional mortgage quickly. Once the buyer has the appropriate amount of equity in the property (70 to 80 percent) they can then apply for traditional financing from a bank or commercial lending institution. Securing a traditional mortgage against the property will provide the buyer with the funds necessary to pay off the contract for deed and thus alleviate the need to make the balloon payment at the end of the contract.
-
1
