The pros and cons of a contract for deed.
Learn what a contract for deed entails, and the advantages and disadvantages of using one.
What is a contract for deed?
A contract for deed is a unique financing tool available for a buyer, typically used when purchasing property. The buyer makes monthly payments on the property and receives the title only after the full purchase price is paid. The seller retains the title of the property until then.
Whether you’re the buyer or the seller, there are both advantages and disadvantages to a contract for deed.
What are the advantages of a contract for deed?
When you’re the buyer, a contract for deed is a way to purchase property when you might not otherwise qualify for a conventional loan. You might also be able to use it as a faster option for purchasing property than traditional methods allow.
On the other hand, when you’re the seller, a contract for deed can broaden the field of potential buyers and might result in a faster sale. This can be useful when you can’t find a buyer who is able to qualify for a conventional loan.
What are the disadvantages of a contract for deed?
There are also a few disadvantages for buyers who choose to use a contract for deed.
If you fall behind on payments, the contract can be terminated and you will lose whatever equity was previously built. Furthermore, if the seller has a mortgage and defaults on their payments, you may lose the property even though your own payments to the seller are current.
If you’re trying to sell a property using a contract for deed, the disadvantages pertain to the way the purchase is handled. A contract for deed typically requires only a minimal down payment, and the subsequent payments are made in installments. This can be a problem if you need immediate funds to buy another property.