A contract for deed, also called an installation contract or land contract, enables the seller to finance a buyer by permitting him to make a down payment followed by monthly payments.
However, title remains in the name of the seller. In addition to its wide use in financing land sales, it has also been a very effective financing tool in several states as a means of selling a house contract for deed during periods of tight money. For example, a homeowner owes $25,000 on his home and wants to sell it for $85,000. A buyer is found but does not have the $60,000 down payment necessary to assume the existing home loan. The buyer does have $8,000, but for one reason or another money is not available from institutional lenders. If the seller is agreeable, the buyer can pay $8,000 and enter into an installment contract for the remaining $77,000. The contract for deed will call for monthly payments by the buyer to the seller that are large enough to allow the seller to meet the payments on the $25,000 loan plus repay the $52,000 owed to the seller, with interest. Unless property taxes and insurance are billed to the buyer, the seller will also collect for these and pay them. When loan money is later available from institutional lenders, the contract for deed and existing loan are paid in full and title is conveyed to the buyer. Meanwhile the homeowner continues to hold title and is responsible for paying the mortgage. In addition to wrapping around a mortgage, an installment contract can also be used to wrap around another installment contract, provided it does not contain an enforceable alienation clause.
Because title is not conveyed until some later date, the buyer is in a vulnerable position. It is possible that the buyer could make all the required payments only to find that the title cannot be delivered because the seller died or became legally incompetent, or because the seller did not pay the existing mortgage payments as agreed, or because the property has become encumbered with new liens against the seller. Commonly used safeguards are to (1) record the contract, (2) have a neutral third party (escrow) collect the buyer’s payments and disburse them to existing lien holders and the seller, and (3) have the seller sign a deed now and place it into escrow for delivery later.
Recording the contract puts the public on notice that the buyer has an equitable interest in the property that is superior to subsequent encumbrances. The use of a disbursing agent gives the buyer confidence that existing liens are being paid. Holding the deed in escrow avoids death and incompetence complications, but it does place a major responsibility on the escrow agent to make certain the contract has been properly fulfilled before releasing the deed to the buyer.
Contract For Deed To Option