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Contract for Deed

Contract for deed is a real estate technique used when sellers finance all or part of the mortgage loan. The seller executes a contract which details the terms of the sale. Both the seller and buyer must sign the contract and have it notarized in order for it to be legally binding. The seller retains the property deed until contract terms are fulfilled.

The most common uses of contract for deed include lease-to-own, land contracts, and seller carry back mortgages. While contract for deed has been used for decades, this type of financing has become quite popular in recent months.

When the mortgage crisis occurred last year, banks implemented new lending procedures which disqualified many potential buyers. In order to sell realestate, property owners were forced to engage in creative financing techniques. Otherwise, they might never attract qualified buyers.

Contract for deed agreements can be structured to suit the needs of all parties involved. Typically, sellers require buyers to provide a down payment towards the purchase of real estate. The purchase price and interest rate are determined at the onset of the agreement. Once established, these amounts cannot be changed unless a new contract is executed.

Experts recommend hiring an attorney to execute and review real estate contracts. Doing so ensures both parties are protected in the event of default.

Buyers who purchase residential homes using contract for deed are given "equitable" title to the property. Equitable title allows the buyer to use the home as their primary residence or as rental property. The buyer can make improvements without obtaining consent from the seller. Equitable title also grants the buyer the ability to deduct mortgage interest and home improvements from their taxes.

The IRS recognizes contract for deed transactions as a sale. Sellers must report contract for deed transactions under the ruling for installment sales. Once sellers enter into contract for deed with residential properties they can no longer deduct expenses associated with the real estate.

It is important to realize contract for deed transactions are not risk-free. Both buyers and sellers should engage in due diligence. Experts recommend obtaining a credit report and background check and conducting research to ensure the sellers are authorized to engage in contract for deed. Believe it or not, some people attempt to sell property they do not own.

Our real estate library is packed with articles regarding contract for deed and creative financing options. We also offer articles about real estate investing, buying foreclosure and bank owned properties, short sales, and probate real estate.

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Published on May 08, 2009 at 02:22 AM | Comments: 1

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Comments

I was wondering what the FHA program was like. My score is not high but I make my payments on time, I think it was 600 but not high enough for a regular loan.
Thanks
LuAnn

LuAnn | March 3, 2013 5:03 PM

 

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