July 28th, 2007
What Can Go Wrong with a Contract For Deed?
A Contract for Deed is when the Seller finances the sale yet retains title
to the property until the contract is paid in full. As mortgage lending
standards tighten I believe Contract for Deeds will become more popular.
What are the risks to the Seller? I speak from experience.
1) The Buyer stops making payments. That's a simple remedy, you just cancel
the contract, which typically takes 60 days and no court action. You, as the
Seller, keep the down payment and whatever funds you have received from the
Buyer. Then you still own the property to sell to someone else. All in all,
a good deal.
2) The Buyer stops making payments and leaves a huge houseboat on your land
that got there by trespassing on the neighbors land, who has since built a
fence. Cost to Seller: $2,000 to have someone saw the boat in pieces and
haul to the landfill. Then resold the land to someone else at a higher
price. Still ahead of the game.
3) The Buyer stops making payments and incurred mechanics liens on your
property. Your contract for deed may specify the Buyer doesn't have the
right to do this, but it happens. And if the lien happened to improve your
property than no big deal.
4) The Buyer gave you a nice down payment, pays well for 18 months, then you
start getting notice they missed the homeowners insurance payment-which you
quickly pay because its still your house if it burns down. Then they stop
making payments. Then you get a notice that the Buyer has declared
bankruptcy. The 60 notice cancellation no longer cuts it-time to find a
lawyer well versed in both real estate and bankruptcy-harder than I thought
it would be, but I found one. Bankruptcy Court lifted the stay on
foreclosure and I got the house back.
5) Market Risk-see above-market had slowed and it took a while to resell the
house-still came out ahead with the prior Buyers down payment and 18 months
of interest, taxes and insurance.
6) Buyer trashes your property. Not much risk on land-and I've never had
that happen to a house as I've been very careful about selecting buyers. Its
been my experience that if the Buyer really wants to own that home they will
take care of it..
What risk is there in a Contract for Deed for the BUYER?
I always believed the only risk to the Buyer was if they didn't have the
money to be current on the contract they would have lost all the funds
previously paid and lost the right to buy the property.
Until I got an appraisal job with an interesting story.
The Seller had a larger farm on a highway and intended to break the farm
into several lots. The Buyer buys the first lot with highway frontage in the
middle of the property. He purchased this on a Contract For Deed which he
paid off over 20 years. Then the Seller refused to give the Buyer the deed.
This should be a simple case of Specific Performance. But it gets worse.
The legal description for his "lot" was a metes and bounds description.
Problem is, none of the other lots were sold and the Seller never divided
the property. So the buyer has a paid for interest in a parcel that does not
have a property ID number, making it difficult to pass title.
More time goes buy, the Seller still refusing to sign over the deed to the
land the buyer has paid for.
Meanwhile, the community has grown around the parcel, zoning rules have
changed, and the highway frontage on the buyers property is not permitted as
an access. Essentially the buyer has a landlocked parcel and the seller
needs to plat the property and build a road to this parcel.
So now you have much more than a Specific Performance case, as the City must
be involved in any legal action as they must approve how to subdivide and
access the property.
And the Seller still refuses to do anything to remedy the situation.
So, what can go wrong with a Contract for Deed? Let me know your stories.