Why I Love Contract for Deeds

Unlocking Home Selling Potential: Why I Love Contract for Deed Sales
For homeowners looking to sell, navigating the traditional real estate market can sometimes feel restrictive. However, an alternative approach, the contract for deed, offers a unique set of benefits that can be particularly appealing. From potentially exceeding your asking price to offering flexible terms for buyers, here’s why a contract for deed might be an attractive option for selling your property.
What Exactly is a Contract for Deed?
A contract for deed, also known as an installment sale agreement or land contract, is a real estate transaction where the seller essentially acts as the lender. Instead of the buyer obtaining a traditional mortgage from a bank, they make regular payments directly to the seller over an agreed-upon period.
During this period, the buyer typically has the right to live in and use the property (equitable title). However, the seller retains legal title to the property until the final payment is made and all contract terms are fulfilled. At that point, the seller transfers the deed to the buyer, and they become the full legal owner.
The Seller’s Advantage: Earning More Than the Asking Price
One of the most compelling reasons to consider a contract for deed is the potential to earn more than your initial asking price. How? Through accrued interest.
In a conventional sale, the seller receives a lump sum from the buyer (or their lender), and that’s generally the end of their financial gain from the property itself. With a contract for deed, the agreed-upon sale price is paid in installments, and these payments typically include both principal and interest. This interest, paid by the buyer directly to you, the seller, over the life of the contract, can significantly increase your total return on the property. Essentially, you’re not just selling a home; you’re also making an investment that generates income over time.
Flexibility in Down Payments: Opening Doors for More Buyers
Another significant advantage is the flexibility offered in structuring the down payment. Traditional mortgages often come with stringent down payment requirements that can be a barrier for many potential buyers.
With a contract for deed, the seller and buyer negotiate the terms, including the down payment amount. This can range from a more traditional percentage to a lower, more accessible figure, depending on the seller’s comfort level and the buyer’s circumstances. This flexibility can broaden the pool of potential buyers for your property, including those who might not qualify for conventional financing at that moment but are otherwise reliable and capable of homeownership.
Strategic Balloon Payments: A Win-Win Scenario
Contracts for deed often include a “balloon payment.” This is a larger, lump-sum payment due at the end of the contract term. While the monthly installments cover part of the principal and interest, the balloon payment typically settles the remaining balance of the loan.
A particularly strategic way to structure this, and a personal favorite, is to set the balloon payment to become due when the buyer has built a certain amount of equity in the home – for instance, when their payments have reached a point where they effectively have 70% equity.
Here’s why this can be beneficial:
For the Seller: By this point, the buyer has a significant vested interest in the property, making them more likely to secure traditional financing to make the balloon payment and complete the purchase. The seller has also received consistent payments and interest up to this point.
For the Buyer: Having built substantial equity makes it considerably easier for the buyer to qualify for a conventional mortgage to pay off the balloon. They’ve had time to improve their financial standing or credit if needed, all while living in and treating the home as their own.
This structure provides a clear pathway to full ownership for the buyer while offering security and a favorable return for the seller.
Important Considerations
While contract for deed sales offer compelling advantages, it’s crucial for both sellers and buyers to approach them with a clear understanding of the terms and potential risks. It’s highly recommended that both parties seek independent legal counsel to ensure the contract is fair, clearly outlines all responsibilities (like property taxes, insurance, and maintenance), and complies with all state and local laws.
In conclusion, a contract for deed can be a powerful tool for sellers, offering the potential for enhanced financial returns, greater flexibility in attracting buyers, and creative structuring of the sale. By understanding its mechanics and thoughtfully crafting the agreement, sellers can unlock unique benefits in the disposition of their property.
I have used these wonderful tools for buying and selling homes. As of this writing I am buying one and selling one using a contract for deed. No credit pulls, variable down payments, interest rates are negotiable, and the seller gets paid more than asking if they have time. DO NOT TRY THIS WITHOUT LEGAL GUIDANCE!! I ALWAYS use a lawyer to draft the final paperwork to protect all parties involved. Many Realtors don’t understand the intricacies of a properly done contract for deed either. Reach out to me, other professionals and lawyers who understand these documents before you sign on the dotted line. Just like any good tool, these can be abused by either side of the transaction. Let me know if you’d like some tips or ideas to help you keep the deal fair.
Thanks for reading,
Bill Dean