Make sure that the seller really owns the property. You risk losing the house and everything you paid for if it has a mortgage and is foreclosed. Check with a title agent or the county real estate office to see if there is a mortgage or other lien on the property. A title agent can also ensure that the contract is properly registered with the county, as required by state law. This will also help prove your ownership of the property and protect you from subsequent charges that the seller places on the property. Contracts are a more popular financing alternative among minority buyers, especially Hispanics. According to data from the latest U.S. Housing Surveys, while only 5% of all residential households in the U.S. had deed contracts in 2005, 9.5% of Hispanic households and 7.1% of black condominiums across the country used them.1/ (See the table below for more figures on the use of contracts for deeds.) Although deed contracts are sometimes referred to as the “poor man`s mortgage,” results from the American Housing Survey show that only 3.9 percent of U.S. households below the poverty line used them in 2005. The Family Housing Fund – a twin Cities-based nonprofit – is launching a new program that will also use the contract as a tool to create affordable housing options.
The new initiative, The Bridge to Success Contract for Deed Program, was launched in the fall of 2008. Another risk for contract buyers arises from the fact that the seller retains ownership of the property for the duration of the contract. Since the seller retains ownership, he or she can continue to encumber the property with mortgages and liens. The seller is only obliged to transfer ownership of the property when the purchase price has been paid in full and it is time to deliver the title. He is not required to have good goods at the time of performance of the contract or during the term of the contract. According to state law and if the contract is registered in a timely manner, the buyer`s interest may prevail over those pre- and post-contractual charges that the seller places on the property. A contract for one deed allows hopeful homeowners to make payments directly to a seller for a predetermined period of time to buy a home. While the contract for deeds may allow some to buy a home they wouldn`t otherwise have access to, there are still pros and cons to the deal.
Williams warns that unexpected home repair costs can also pose a risk to buyers in a contract for the deed. While this risk also applies to buyers who purchase homes through traditional mortgages, it may be higher in the case of homes purchased through deed contracts, as a seller may perform a contract on the deed with limited disclosure of the condition of the property. Minneapolis-based attorney Larry Wertheim explains that in a third-party financed sale, the lender`s strict requirements for credential review, title insurance, and valuation provide the buyer with the collateral benefit of disclosure. Unless the buyer has legal advice in a contract relating to the deed or is aware of the need for valuation and verification of title, the transaction may not contain these guarantees. Since many homebuyers choose a contract for a deed because their low credit prevents them from getting a conventional mortgage, they are unlikely to qualify for loans to finance repairs. Ultimately, property defaults could increase the likelihood that the buyer will default and lose the home. However, this alternative financing mechanism does not have many of the protections afforded to borrowers with traditional mortgages. In addition, such contracts may contain provisions that leave room for abuse and may present risks and uncertainties for both the buyer and the seller. The following article presents the basic facts and characteristics of the deed contract and provides suggestions to minimize the risks associated with this mortgage replacement. If the buyer is in default of payment, the seller can repossess the property. The buyer holds a fair title, while the seller has the legal title. Unless otherwise agreed, the equity claim grants the buyer almost the same privileges as he would have as the owner.
The biggest advantage for the buyer is that you don`t have to qualify for bank financing. You can enter the property quickly and without a large down payment, you can make improvements to the property, you can get tax benefits, and you have time to improve your credit situation. You can also benefit from a lower interest rate than the market. The advantages for commercial buyers are that you can rent the properties to cover the cost of the deal, perhaps even with a profit. The deed contract can be considered a special type of real estate contract in which the seller provides the buyer with funds to buy the property at an agreed purchase price, and the buyer repays the loan in installments. When the total purchase price, including interest, has been paid, the seller is required to sign a deed (see: deed) to transfer ownership of the property to the buyer. .