Contract for Deed, a/k/a “Contracts for Doom”

Traditional home purchase financing has barriers for certain buyers and sellers who would typically purchase property outright. Some buyers face the high the cost of obtaining a loan or sellers know their property may not pass a bank inspection. When faced with these challenges people turn to an alternative: the Contract for Deed. Contracts for Deed (also known as Agreement for Deed, Contract Sale, Real Estate Installment Agreement, or as I would say “Contract for Doom”) are legally binding.

Upon entering a Contract for Deed, a seller agrees to convey the property to a buyer. The buyer makes payments like mortgage payments or assumes the seller’s mortgage payment. Yet, the seller retains legal title, until the buyer completes all payments. In the meantime, the buyer is the “equitable” owner. The buyer is not the legal owner until the contract is fulfilled.

Contracts for Deed are often riddled with opportunities for problems. Many horror stories exist. We encourage both buyer and seller to strongly consider the risks before entering into a Contract for Deed:

  1. Title: As a buyer, you must consider that you do not obtain legal rights to the property until all payments are complete.
  2. Title Defects: Since no traditional closing process occurs, the buyer may forget to obtain a Title Insurance Policy, conducting a title search, and does not know whether a defect on the title exists. The buyer could face larger problems if they obtain the title years later, try to sell the property, and finds they do not have the marketable title.
  3. Seller’s Liability: As the seller retains the legal title to the property, the seller could face legal responsibility for injuries or damages that occur on the property while the buyer occupies the property. The seller could remain responsible for taxes or other contractual violations related to the property. The seller would be required to sue or join the buyer on any related litigation adding complexity to any lawsuit.
  4. Default:
    1. Common: Although the parties may have the best intentions upfront, the length of the term of these agreements provides many opportunities for the parties to default, and defaults are common in Contracts for Deed.
    2. No short cuts: Unfortunately, no short cuts exist to remedy the buyer’s default. Contracts for Deed often include specific language designating the seller’s rights and remedies. However, these terms may not hold up because the buyer has an “equitable” title.
    3. Foreclosure: The seller cannot simply evict the buyer but must foreclose upon the property to regain possession. Foreclosure proceedings are much more costly and time consuming than evictions, and the buyer may put up a full defense.
  5. Ambiguous: Parties may enter into an agreement drafted from standard form terms, or fail to anticipate future conflicts. If the contractual language is unclear, months of litigation could ensue simply to determine ownership interest or damages.

Please consult a real estate attorney prior to entering into a Contract for Deed. An experienced attorney at Hyde Law Firm, P.A. can discuss with you today.

Contact Hyde Law Firm, P.A. to schedule a consultation today, 864-804-6330.