In this article we will be looking at selling your property on contract for deed.
Purchasing on contract is not new to the real estate industry. It’s yet another creative method of structuring a win-win situation for both you and the prospective buyer. Now let’s look at an explanation of a traditional real estate contract and a contract for deed transaction.
Traditional real estate transaction
In a traditional real estate transaction the buyer deposits earnest money and a contract to purchase the property is executed between the buyer and the seller. Within the body of the contract the terms and conditions of the transaction are outlined. This includes key points such as purchase price, closing date and financing information.
The financing information that’s included is the down payment amount, interest rate the buyer is seeking and the term of the mortgage (typically 30 years). A pre-qualification or pre-approval letter from a bank or mortgage company usually accompanies the contract. The traditional method obviously allows the bank or mortgage company to finance the purchase for the buyer.
Contract for deed real estate transaction
With a contract for deed purchase everything works exactly the same as the traditional purchase with one exception. The one exception is a big one, so lean in and read closer. The seller actually acts as the bank and finances the real estate for the buyer. Again, the contract is pretty much the same. However, the financing terms and conditions apply directly to you. The downpayment would be paid to you along with the monthly mortgage payments.
I can hear you saying, why would I do something like this? I’m not looking to play banker, nor am I not looking to play banker for 30 years. Let’s re-focus, remember that our goal is to make money in real estate right now! This is yet another method to do just that. Let me put your mind as ease. You are not financing the property for 30 years. You are simply providing interim financing.
This interim financing combined with the buyer building or reestablishing their credit and financial situation will allow them to obtain a mortgage from a bank or lending institution and refinance at the end of the contract period. This refinancing will cash you out and transfer title to the buyer.
During the term of the contract for deed the buyer is responsible for the mortgage payment to you, 1/12 of the annual real estate taxes, homeowner’s insurance and maintenance and upkeep of the property. The key points of structuring a win-win contract for deed situation are as follows:
Your purchase price should be in line with similar properties that have sold within the area, with the area being no more than 8 blocks in any direction. I’d suggest pricing your property in the middle of the selling range for your area. This allows for changes in the market, both upward and down. It also makes your property more marketable.
Please remember that you can ask and may even get whatever you want for your property right now. However, at the end of your contract for deed term, your property will need to be appraised by the lender for the original agreed upon contract price. Do your homework.
The downpayment you request is up to you. Generally speaking the type of buyer that is looking to purchase on contract has credit issues of some sort. That can range from non-existent to very bad. Call some banks and mortgage companies to get some ideas of the downpayments they are requiring.
The interest rate is also up too you. However, I’d also suggest checking banks and mortgage companies to get ideas. Also make sure you check your states usury laws (if applicable) to make sure you don’t exceed legal limits. Again, the type of buyer that you will be financing will more than likely expect a higher rate given their credit situation.
The term is very, very, very important. Did I mention that it’s important? This establishes how long the perspective buyer will have to execute the contract for deed. Once you have someone that’s interested in your property you should meet with them and map out a plan. This plan should basically address how they plan on becoming a ready and able buyer.
It also should include how long it will take. It’s crucial for the buyers to be realistic and know what they are capable of. A two to five year contract for deed is plenty of time for someone to turn around their financial situation and make the purchase.
This section is just as important as the term section. We all want things to work out. But unfortunately things don’t always go according to plan. The exit/escape clause spells out how both you and the buyer will handle a default in the contract for deed. This section will cover things like not maintaining homeowner’s insurance, late payments and not being able to obtain a mortgage at the end of the term.
You may be asking, where do I get the contract for deed? A good place to start is with a local real estate agent. The contract for deed forms are usually in our file cabinets or on our hard drives. You can also search online and find an acceptable form fill version from more than a few websites. As I always suggest, if you’re not comfortable with working with the forms yourself, seek legal advice.
Selling a property on contract for deed can be a mutually beneficial method to for both buyer and seller. I’ve personally used it to sell and purchase property with success. Investing in real estate can be challenging in today’s market.
But please remember, it’s the basics that keep us in business during the hard times. I hope that you’ve enjoyed reading this short series as much as I’ve enjoyed writing it. My job is to keep you in the real estate know.