Part One: "Contract For Deed"
In part one of this multi-part series, we're discussing various ways to creatively finance your next home purchase, even if you just went through a foreclosure last month. There are literally dozens of creative ways to purchase a piece of real estate. Contract for Deed is one that is not well known to the general public, and your local mortgage lender does not want you to know that there are many ways to finance a home purchase without jumping through endless "hoops" trying to qualify for a mortgage.
A contract for deed simply means that a buyer and seller enter into an agreement in which the seller agrees to sell a piece of real estate to a buyer for monthly payments. When the buyer has made all of the agreed upon monthly payments, the buyer receives title to the property.
As a seller I like this type of agreement because I still retain my title to the property while the buyer is making payments. If the buyer defaults on the contract, I may not have to go through a foreclosure proceeding. And my profits from the sale of the property are only taxed as they are received, so I can spread out any tax liability over a number of years, instead of having to pay capital gains taxes on an entire sale all at once.
As a buyer I like the idea of a contract for deed because I do not have to worry about trying to qualify for a traditional mortgage - a process that tends to be a big hassle and usually costs a lot more than a simple contract for deed. And if you've had financial problems during the recession, you may not be able to qualify for a mortgage through a typical lender.
There is not much difference really, where a buyer is concerned, between a contract for deed and a traditional mortgage. Even though a traditional mortgage allows a buyer to obtain a title deed to the property at closing, in reality, the lender holds the right to foreclose on the property if the buyer defaults on the mortgage.
In a contract for deed, the buyer does not receive the title until they have paid all of the agreed upon payments. In this case, the buyer has "equitable title" to the property, which gives them to right to possess the property, rent the property, improve the property, etc. From the buyers point of view there is very little difference on a day to day basis. Make your payments, stay in your property. Don't make your payments, you could lose your property. It's not all that different for a buyer, except that the buyer is working directly with a seller, instead of dealing with a bank that has 20 offices in 18 states. In many ways it's easier than a traditional mortgage with a big corporate lender, and it's likely to be cheaper as well because there is no loan origination fee. And a buyer may save money by avoiding a variety of other lender related fees as well.
When negotiating a contract for deed with a seller, the agreement should contain all of the essential information:
* Identify the buyer and seller.
* A legal description of the property.
* The terms - total price, monthly payment amount, interest rate, total number of payments to be made.
* What happens if the buyer defaults.
* Sellers responsibilities for transferring the deed.
* Any other items or details that need to be included.
A buyer who wants to propose a purchase to a seller using a contract for deed should focus on the potential income the seller will realize from principal and interest payments over time. Sellers will end up earning more money with seller financing, as they will earn interest along with the principal payments.
Sellers can do a contract for deed even if they have an existing mortgage on the property. Yes, it does technically trigger the "due on sale clause" in an existing mortgage, but in a world filled with millions of foreclosures, the bank will be loathe to call the loan due as long as the payments are current. In spite of due on sale clauses, I do not personally know of one single case where a bank called a loan due where the payments were current.
Buyers want to search for sellers who are willing to be flexible or creative. Usually sellers who are motivated will be open to such creative ideas. Get a good real estate attorney to assist you in writing or reviewing any agreement, and make sure that your interests as a buyer are protected. There are some scammers out there who like to take a buyers money, then disappear. Have your attorney address common issues in the agreement so that you as a buyer have recourse if a seller does not want to honor the agreement.
Buyers should always have a title search done, and consult your attorney about title insurance. When done correctly this could be a great way to buy your next home even if your credit score is too low to get a regular mortgage. Once you discover the world of creative ways to finance a home purchase, you'll never want to go back to the bankers again!
Donna S. Robinson is a 17 year veteran of the real estate industry. She is a real estate investor and investing coach located in Atlanta, GA. Follow her on twitter at donnaconsults. Visit her website at www.RealtyBizConsulting.com