Contract for deed (aka land contract or installment contract) occurs when a buyer agrees to make a down payment and a monthly loan payment, and the seller retains legal title to the property during the contract term and the buyer is granted equitable title. At the end of the contract when the buyer pays off the loan, the seller delivers clear title. Contract for deed is great for people/businesses that want to make high return on the money. Also this is an ideal method to sell a property that requires a lot of repairs or difficult to sell since banks typically do not finance purchases that need a lot of rehab. Unlike a traditional sale when you receive proceeds from the closing, in contract for deed transaction seller becomes a lender and finances the buyer, while making 3-8% return on the money (interest rate is always negotiable). Buyers most likely are willing to pay more for contract for deed purchases since they save money on loan origination and other fees that banks charge while originating the loan.
There are many buyers whose credit isn’t good and they can’t get a loan from the bank, but they have great income and substantial down payment; these people are ideal candidates to buy properties on contract for deed. After they rebuild their credit and can obtain a loan from a bank, they can pay off the contract for deed sooner. There are several advantages on selling on contract for deed: you can get high return on the loan that you will be giving to a buyer (3%-8% which is much higher than bank would pay on certificate of deposit). Second advantage is when you compare contract for deed sale to a traditional sale where loan is obtained from the bank: if your buyer stops making payments, you will keep the down payment that buyer has made and can evict the buyer from the property within 60 days by canceling the contract if buyer doesn’t bring the loan current. In traditional sale if loan is obtained, lenders have to wait up to 12 months in order to complete foreclosure process and get the property.
Many states now offer some legal protection to defaulting buyers under contract for deed, thus Real Estate Liquidators recommends contacting real estate attorney in your state regarding this matter.