What You Should Know About Seller-Financing (Contract for Deed Sales)



by Mark Bingaman
Photo credit: http://www.cbtownandcountry.com

There’s been a significant increase recently in the number of U.S. real estate transactions financed by  sellers, a rise that can be viewed as both a good and bad thing.

Known as contract for deed sales, these deals are believed to be on the upswing as a result of the real estate market continuing its recovery from the 2008 Great Depression. Now that property prices have rebounded, investors who snapped up foreclosures in bulk are eager to reduce inventory by offering contract for deed options to interested buyers who are unable to qualify for a traditional mortgage. Of course, many of those folks suffered credit damage due to foreclosures during the recession, so there’s something of an unfortunate cycle at play here.

Sellers Offer Great Opportunity to Those with Damaged Credit

Your mortgage company says “No!”

The seller says “Yes!”

If you’re an individual or family with damaged credit and long to own your own home or buy land, your options are pretty limited. Seller-financing can be a valuable service and opportunity to buyers who would otherwise be unable to purchase land or a home.

Sellers assume some risk as they enter into a deal with credit challenged buyers. And, in many cases, the seller may be abandoning a quick cash payday on the sale and entering into the arrangement out of the “goodness of their heart” and a sincere desire to help a worthy individual or family achieve the dream of owning their own property or home.

Finding a seller willing to finance the purchase of land or a home or building can be an absolute miracle for those who wish to buy land but cannot assume a traditional mortgage.

Sellers also realize a number of benefits by financing the deal themselves including:

  • Say goodbye to closing costs like real estate agent commissions. (This ranges from 5%-8% of the purchase price).
  • Closing costs such as appraisal fees, inspection fees, credit report fees, title insurance, and other lender-related charges also disappear.

Buyer Basics Concerning a Contract for Deed

Buyers typically agree to a monthly installment plan to purchase the land and/or home. The most serious mistake buyers make is not truly understanding the terms of most contract for deed sales and how it can play out.

  • Buyers don’t own the land or receive the deed until the loan is completely paid off
  • Buyers accrue no equity
  • Missing even one payment means the deal can be voided and, if the land or a structure is inhabited, be grounds for eviction within as little as 30 or 60 days

Repairs and Seller Financing for Property

In many cases, land or structures purchased under a contract for deed transaction will require repairs and improvements. Buyers often underestimate the money needed for repairs or issues with the land, so keep this in mind as you budget how much you can afford to pay each month under a contract for deed sale.

At LandHub.com, we believe that everyone should enjoy the American dream of land ownership and home ownership. Contract for deed sales can be a way to achieve that dream, but both sellers and buyers should fully understand the arrangement and carry out the deal with both integrity and fiduciary responsibility.

Additional Resources: Federal Reserve Bank of Minneapolis: Risks and Realities of the Contract for Deed

Minnesota Home Ownership Center: Contract for Deed

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