How to Purchase a Home With a Contract for Deed

Purchasing a home with a contract for deed might be a good alternative if you compare battling the credit crunch for conventional mortgages. Contracts for deed (aka land contracts) have been around for years and were originally used for agricultural properties. It is a simple installment contract used to get owner financing with little risk to the seller since the buyer does not take title to the property until he pays off the seller and the contract for deed is paid in full. All details of how the buyer finalizes the actual buyout, buyer and seller responsibilities, and the interest rate (which is negotiable) must be spelled out in the contract.

Difficulty: Moderate

Instructions

Things You'll Need:

• Attorney
• Down payment
• Title search

Buying A Home With A Contract for Deed

1. Find a seller with a property that suits you and talk about using a contract for deed. Inquire about the sale price, and, if all details are agreeable, discuss the down payment. The title is not passed to you until the contract is paid off in a contract for deed, so be sure to discuss agreeable terms and the rate and payment, as well as when the contract must be paid off. All details of the contract for deed should be spelled out including down payment, the payoff of the contract, responsibility of property upkeep, payment of taxes and insurance, and possible resale of the property during the contract stage (before the contract is paid off and the deed is passed to the buyer).

2. Think ahead. If the seller requires that you buy out (pay off) the contract using a mortgage in a year or two, visit a bank or mortgage company and discuss your income, credit and purchase plans. Be pre-qualified now so you will know what might need clearing up before trying for a mortgage later. Ask your lender if it will require the seller to give you a "quitclaim" Deed (a deed that warrants nothing except that he is giving up a portion of or all claim he has on the property) prior to your refinance, which would pay off the contract.

3. Discuss terms with the seller. Solidify the agreement by having an attorney draw up the contract. Ask the attorney to complete a title search to be sure property is clear of liens. Discuss with the attorney how laws in your state look at this type of contract and whether you are able to file a homestead exemption with the local tax office. A homestead exemption allows for a reduction in property taxes for an owner who occupies the home as his primary residence.

4. Set up a meeting with the seller to go forward with the transaction. Have funds ready for a down payment per the agreement with the seller.

5. Be certain all details are spelled out in your contract. If you are getting credit for a down payment, be sure it is noted and keep copies of the cashier's check or other means of payment for later proof in case you will be seeking a mortgage to buy out (pay off) the contract.

Tips & Warnings

• Contracts for deed are simple installment contracts, and homes can be bought in this way, but title does not transfer until it is paid off. Because of this, contracts for deed can be written as balloons. (You make payments for a brief period, then the balance comes due.)
• Since title has not transferred to the purchaser, it is very easy for the seller to end the contract and have the buyer evicted in case the buyer defaults on payments or does not perform in other ways spelled out in the contract. This is another good reason to use an attorney so that the language regarding this is spelled out in the contract. Since the buyer has technically become the homeowner, he becomes responsible for upkeep on the home and for paying taxes and insurance. Some lenders might require that the contract for deed be filed in the local courthouse and might require a quitclaim deed from the seller to the buyer as well, for more proof that the buyer is actually the owner in order to refinance the transaction.

References

• Risks and realities of the contract for deed