Contract For
Deed Alternative
Sources To
Institutional
Lenders...
A contract for
deed, also called an
installation
contract or land
contract, enables
the seller to
finance a buyer by
permitting him to
make a down payment
followed by monthly
payments.
However,
title remains in the
name of the seller.
In addition to its
wide use in
financing land
sales, it has also
been a very
effective financing
tool in several
states as a means of
selling homes during
periods of tight
money. For example,
a homeowner owes
$25,000 on his home
and wants to sell it
for $85,000. A buyer
is found but does
not have the $60,000
down payment
necessary to assume
the existing home loan.
The buyer does have
$8,000, but for one
reason or another
money is not
available from
institutional
lenders. If the
seller is agreeable,
the buyer can pay
$8,000 and enter
into an installment
contract for the
remaining $77,000.
The contract for
deed will
call for monthly
payments by the
buyer to the seller
that are large
enough to allow the
seller to meet the
payments on the
$25,000 loan plus
repay the $52,000
owed to the seller,
with interest.
Unless property
taxes and insurance
are billed to the
buyer, the seller
will also collect
for these and pay
them. When loan
money is later
available from
institutional
lenders, the contract
for deed and existing loan
are paid in full and
title is conveyed to
the buyer. Meanwhile
the homeowner continues
to hold title and is
responsible for
paying the mortgage.
In addition to
wrapping around a
mortgage, an
installment contract
can also be used to
wrap around another
installment
contract, provided
it does not contain
an enforceable
alienation
clause.
Because title is
not conveyed until
some later date, the
buyer is in a
vulnerable position.
It is possible that
the buyer could make
all the required
payments only to
find that the title
cannot be delivered
because the seller
died or became
legally incompetent,
or because the
seller did not pay
the existing
mortgage payments as
agreed, or because
the property has
become encumbered
with new liens
against the seller.
Commonly used
safeguards are to
(1) record the
contract, (2) have a
neutral third party
(escrow) collect the
buyer's payments and
disburse them to
existing lien holders
and the seller, and
(3) have the seller
sign a deed now and
place it into escrow
for delivery
later.
Recording the
contract puts the
public on notice
that the buyer has
an equitable
interest in the
property that is
superior to
subsequent
encumbrances. The
use of a disbursing
agent gives the
buyer confidence
that existing liens
are being paid.
Holding the deed in
escrow avoids death
and incompetence complications, but
it does place a
major responsibility
on the escrow agent
to make certain the
contract has been
properly fulfilled
before releasing the
deed to the
buyer.
Contract
For Deed To Option
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