Contract for Deed: The Basics
In the realm of real estate transactions, there are many different methods for buying and selling property. Savvy investors know this and utilize creative methods to create successful and profitable deals.
One way of selling or buying property is through a Contract for Deed, sometimes referred to as Seller Financing. Contract for Deed is an alternative to the traditional mortgage route, offering benefits for both buyers and sellers. Let’s break down the basics of a contract for deed, the benefits that can be realized by both buyers and sellers, and show you why it may be worth considering.
what is contract for deed!?
A contract for deed is really simple. It’s just an agreement between a buyer and a seller to exchange real property. Instead of dealing with a bank, the seller becomes your lender. They allow you to make payments over time until you fully own the property. It's like having a mortgage, but with a more personal touch (and usually less hoops to jump through).
why choose a contract for deed?
There are many reasons a seller or a buyer would opt to go with a contract for deed. Let’s take today’s market as an example. Interest rates for a mortgage are higher than we’ve seen in decades, making it challenging for investors to see positive cash-flow on investment deals and making monthly payments on a mortgage extremely high, lowering buying power. Due to this, seller’s aren’t seeing multiple offers we saw a year ago. When utilizing a contract for deed, the terms are all negotiable between the buyer and seller, meaning a buyer could negotiate a lower interest rate than what the market is currently offering, along with other more favorable terms than what a traditional lender can offer.
The seller will receive a monthly payment from the buyer and with the contract in place, they can earn passive income without managing a rental property, paying property taxes and insurance, or deal with property maintenance. There are other tax benefits on the seller’s side that make selling on a contract for deed favorable as well.
Let’s take a look at the hard and fast benefits of utilizing a contract for deed for buyers and sellers:
buyer benefits
Accessible Financing: Buyers with less-than-perfect credit or limited down payment options can secure financing through a contract for deed when traditional mortgage options may be out of reach.
Flexible Terms: Buyers and sellers have the freedom to negotiate terms, making it possible for buyers to customize the contract to better suit their financial capabilities. This is where a lower interest rate may come into play.
Potential Tax Benefits: In certain cases, buyers can see tax benefits, such as deducting property taxes and mortgage interest.
SELLER BENEFITS
Increased Pool of Buyers: By offering a contract for deed, sellers open the doors to potential buyers who may not qualify for traditional mortgage financing, expanding their pool of interested buyers.
Monthly Income Stream: Sellers acting as lenders receive regular payments from the buyer, providing them with a steady monthly income.
Property Security: If the buyer defaults on payments, the seller can reclaim the property, retaining all payments made up to that point.
Tax Benefits: As with any real property sale, the seller will pay capital gains tax, however, on a contract for deed, those capital gains can be reported over the years of the contract vs all at once like a traditional sale.
Key Ingredients of a Contract for Deed:
Similarly to a conventional mortgage, there are several ingredients that make up a contract for deed that the seller and buyer will need to agree on:
Purchase Price: The agreed-upon price for the property, which the buyer and seller settle on together.
Terms and Duration: The contract lays out the payment plan, including how long it will take and how much the buyer will pay at regular intervals. This includes the number of years the contract will last and how long the loan will be amortized over - these two may be different (e.g. 5 year term, amortized over 25 years).
Interest Rate: Most often, there's an interest rate attached to the contract, determining the extra charges on the remaining balance.
Down Payment: The amount you will put down on the property, typically 10-25%, but it is always negotiable and must be agreed upon by the buyer and seller.
Legal Description: The contract includes a fancy legal description of the property so everyone knows what they're dealing with.
Default and Remedies: Just like any agreement, the contract spells out what happens if you miss payments and what actions both parties can take.
As with any Real Estate transaction, it is always advised to work with a professional in the industry to ensure you have bases covered within your contracts - consult with a Realtor or Attorney before signing any contracts.
A contract for deed offers an alternative path to property ownership. It's a great option for those who want flexibility, accessibility, and a more personal touch in their real estate transactions. It also offer’s sellers benefits and a larger buyer pool. Just remember to do your due diligence, seek professional guidance, and understand the terms to ensure a smooth and secure experience.
Ready to embark on your contract for deed journey? Let's make those property dreams a reality!
