Contracts For Deed: An Explanation And General Overview

A contract for deed, also known as “land contract”, is a legal agreement between a buyer and seller of real property, whereby the seller immediately transfers equitable title to the buyer but retains legal title, agreeing to transfer legal title to the property only after the buyer has paid the full purchase price. Unlike a warranty deed, where legal title to the property is transferred from seller to buyer at the point of sale, in a contract for deed, the seller retains legal title, yet the buyer is awarded the right to use the property. Like a mortgage, a contract for deed typically involves monthly payments and an agreed-upon rate of interest. Essentially the seller agrees to sell a property by financing the purchase for the buyer.

In this sense, a contract for deed is a form of seller financing, a type of security agreement, usually used in situations where a buyer cannot obtain a mortgage, due to poor credit or time pressures. Usually the date on which the full amount of the purchase price is due on a contract for deed will be years sooner than when the purchase price would be paid under a mortgage amortization schedule. This payment schedule often culminates in a large balloon payment, which is a final payment much larger than the amount of the previous payments. Sometimes a buyer will obtain a conventional mortgage loan from a bank to make the final payment. Upon tender of the balloon payment and full payment of the purchase price, the seller is obligated to transfer legal property to the buyer. If the buyer can’t afford this large payment, it will probably result in the loss of the property.

Contracts for deed can be written, and modified, by either the buyer or seller, usually with the help of an attorney. It is wise for the buyer to record some notice of his or her interest in the property. In order to be recorded, a contract for deed must include basic information such as the marital status of the parties, the parties’ addresses and address of the property, and in addition to being signed by both parties, the contract’s execution must comply with general formalities, including the presence of unbiased witnesses and a notarized signature.

Because the seller retains legal title to the property, the seller is usually responsible for taxes and insurance, and can pay the taxes and insurance premiums using escrow purchasing whatever interest the seller has. (However, the parties can modify this in the contract.) The seller is also responsible, of course, for any mortgage payments due on the property. Obviously, the failure of the seller to pay these obligations can lead to serious problems for the seller. If the seller fails to pay taxes, insurance, or mortgage payments, the buyer may have trouble obtaining title to the property free and clear of encumbrances even after tendering the full purchase price. The buyer will thus be forced to take appropriate legal action against the buyer for failing to deliver on his promises under the contract of deed.