Contract for Deed
Contract for deed is a type of real estate transaction used when the seller provides whole or partial financing of the deal. The buyer and seller execute a contract outlining the terms of the sale. The seller holds the property deed until contract terms are met.
Contract for deed is commonly used in rent to own contracts, seller carry back mortgages and land contracts. Many sellers are turning to creative financing in order to attract buyers. Between the banking meltdown and credit crisis, sellers are quickly discovering they need to think outside the box in order to sell real estate holdings.
In regard to residential properties, contract for deed grants the buyer "equitable" title. Although the buyer doesn't hold the property title, they are allowed to reside in the home or rent it out, make improvements, and enjoy tax benefits.
The Internal Revenue Service recognizes contract for deed transactions as a sale; allowing buyers to deduct mortgage interest. Sellers are required to report contract for deed transactions as installment sales and can no longer obtain tax benefits associated with the property.
Although contract for deed sales can be beneficial to both buyers and sellers; this type of transaction is not without risk. Sellers should engage in due diligence and run a credit and background check on potential buyers.
Realize that buyers who have recently filed bankruptcy or lost their home to foreclosure will be unable to obtain traditional financing for several years. With contract sales, sellers generally carry the financing for two to three years. Buyers with bankruptcy and foreclosure might not be able to obtain financing for five to seven years.
There are many ways to structure contract for deed sales. Much depends on the sale price and type of property involved. In most cases, buyers are required to provide a down payment ranging from 5- to 10-percent. The purchase price and interest rate are locked in for the duration of the contract. Experts recommend retaining the services of a real estate attorney to ensure both parties are protected.
Contract for deed offers a beacon of hope for individuals who want to buy a house or raw land, but do not have the financial means to do so. Sellers who offer deed contracts can attract buyers who are financially capable of making payments, but don't qualify for traditional lending.
We invite you to learn more about contract for deed and other types of creative financing options in our real estate library. We cover a wide range of topics including: real estate investing, foreclosure, bankruptcy, probate, inheritance, debt consolidation and money management.
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