People call, email and text us quite often looking for a contract for deed. Some people know quite a bit about a contract for deed and some know very little. Here is a basic knowledge on the term “Contract for Deed” and some things you should know before you get into a Contract for Deed.
A “Contract for Deed” itself is a contract between the Buyer and the Seller of the property. The 2 parties draft up a contract that states that the “Buyer” is buying a property from the “Seller” for a determined price, interest rate, length of time etc. This will include the “monthly or yearly” payment that will be paid, the date on which the payments will be made and many other terms of the actual contract. Most will also include a “Balloon Payment Date”. This is often 3 or 5 years into the contract. The “Seller” becomes in theory, the lender in place of the bank. When purchasing a property using a “contract for deed”, the actual “deed” for the property does not transfer from the seller to the buyer until the contract is paid off.
Contract for Deed or a Mortgage? Why do people do Contract for Deeds? For some, it is simply that they do not have a credit score high enough to get a loan from a lender. For others, they may have too many loans in their name and the lender won’t loan any additional funds for a future purchase. Others may even have other reasons for their needs and wants.
Down Payment? Yes, in a contract for deed, you will need to have a down payment. This is the biggest hurdle for most people who inquire on doing a contract for deed. Most of the time, this needs to be at least 10%. Some sellers want 15% – 20% to do a contract for deed. We get quite a few people thinking that they can get a contract for deed with nothing down or thinking that they can make payments on the “down payment”. Most if not all of the time, this just will not work.
Contract for deeds are fairly easy to do. They can have less upfront costs because of less “closing costs”. Keep in mind though, a title search should still be done to make sure that the property can be sold and is marketable. If the seller has a mortgage on the property, you will also want to make sure that they can sell the property on a Contract for Deed.
Give us a call if you have questions regarding doing a Contract for Deed.
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Doug Hoover / Counselor Realty of Bemidji