Agreement
For Deed or Contract for Deed
The term "Agreement For Deed" is also known as a "Land Contract",
"Installment Sales Contract", or a "Contract For Deed".
They are all basically the exact same thing, but for the purposes of this
course, we'll refer to it as an "Agreement For
Deed".
What Is An Agreement For Deed?
An Agreement For Deed is basically seller financing where the seller
gives the buyer the deed to the property after the buyer has paid for the
property through monthly installments. Some agreements state that the seller
will convey the deed and convert to out right seller financing, once the buyer
has made a certain number of payments as agreed.
Buying Under an Agreement For
Deed
If you're looking to buy
a home or investment property by putting little or no money down and without
qualifying, Agreement For Deeds are a great way to do
it. It is fairly easy to get a motivated seller to do an Agreement For Deed even if the seller is concerned about their credit
or concerned about the due-on-sale clause. The seller can feel more in control
with the fact that the deed hasn't transferred yet. This is important to some
sellers who are concerned about you not following through with your side of the
agreement.
As a buyer, it is
important to know that many banks will allow you to refinance an agreement as
if you had a regular seller financed mortgage. This can be very helpful if you
need time to build up your credit and want to get into a home now without
needing a large down payment. And with a refinance loan you don't put money
down like you would on a normal purchase loan.
This means that you could
purchase the property under an Agreement For Deed from the seller using no
money down, then later refinance the Agreement For Deed and pay th~ seller off. As part of the refinance, you can also roll
the closing costs into the loan and not only close using no money, but it is
possible you could actually walk away from closing with money in your pocket.
Selling Under an Agreement For
Deed
If you already own a
property and want to sell it creatively, an Agreement For
Deed is not your best choice. Mainly because Agreement For
Deeds are so much like a seller held mortgage that you actually have to
foreclose on a buyer if the buyer defaults. In some states, foreclosures can be
done fairly quickly so it might not be so much of a factor, depending on what
state you live in.
For the most part, if you
want to sell a property with seller financing but want to retain control and
not have to worry about filing for foreclosure, Lease Options are your best bet
and we'll cover them in the next section.
Because many states require that you foreclose an Agreement For Deed, you will not want to use them when selling but use a Lease Option instead.
Reselling When You Are Buying Under An Agreement For Deed
If you are buying under
an Agreement For Deed and you want to resell the
property, you can do this by doing a double closing where your buyer purchases
the property from you while at the same time, you use those funds to payoff the
seller and get the deed. This is a simple process that most title companies can
handle for you.
Also, if you are buying
under an Agreement For Deed, there is nothing
preventing you from selling the property under a Lease Option. At the point the
buyer exercises their option, you simply do a double closing as we just stated.
Types Of Property To Invest
In
When it comes to the
types of properties you can invest in using an Agreement For
Deed; basically, any property that you feel is a good investment is a good
candidate if the seller is flexible enough. However, as a general rule,
Agreement For Deeds are only used by investors for
buying rental property or on an occasional retail deal. These properties are
almost always nice homes in nice areas needing only minor cosmetic work (if the
home needs any work at all).
As a homebuyer, if you
can find a seller who is motivated or flexible enough, you can purchase
virtually any house you wish.
__________________________________________________________________________________
Summary:
Advantages Of
An Agreement For Deed
You Don't Have To Qualify
As for the advantages of
using Agreement For Deeds when buying, it is basically
a seller held mortgage except that you get title later. Because it is seller
financing, you don't have to qualify like you would on a regular bank loan, nor
would you have to put any money down if you found the right motivated seller.
Little Or No Money Required
In addition to possibly
not having to put any money down, there are no up front closings costs. You'll
be paying those costs later when you fulfill the terms of the agreement and
take title.
You Can Refinance The Agreement
Also, most banks
recognize an Agreement For Deed as being a seller
financing agreement and will allow you to refinance as if you had a regular
mortgage with the seller. Because of this, an Agreement For
Deed can be a very helpful stepping-stone to getting a bank loan without having
to come out of pocket for a down payment or closing costs.
Disadvantages Of
An Agreement For Deed
An Agreement For Deed does
come with some disadvantages.
The Due On Sale
First of all, an
Agreement For Deed does still violate most due-on-sale
clauses even though most people may not realize it. However, many sellers are
still willing to do them because they feel that a bank won't call a loan due if
the title hasn't transferred and the payments on the loan are being made.
Seller May Have To Foreclose
If you are the seller
under an Agreement For Deed, one of the disadvantages
is that you almost always have to foreclose on the buyer in the event the buyer
defaults. This is mainly due to the fact that an Agreement For
Deed is considered an "installment sale", which is basically a
mortgage. The seller also couldn't just evict the buyer as if they were a
tenant.
As a buyer, you don't
always want to counsel the seller on what would have to be done in the event
you defaulted. After all, you as the buyer are supposed to follow through on
the agreement and not default, so the seller might wonder why you would be
disclosing this. Also, every seller can seek legal counsel if they wish. You
will however want to let the seller know that an Agreement For
Deed does give rise to the due-on-sale clause. At the same time, you'll want to
explain to them that it is highly unlikely that any bank would call a loan due
when the title hasn't transferred and the payments on the loan are being made.
If the seller is reluctant to do the deal because of the due-on-sale clause, then you'll want to offer them a Lease Option.
