What is a Contract for Deed?

By | November 19, 2007

There are many names for Contract for Deed. It is sometimes known as a Land Contract, an Agreement for Deed, a Contract Sale or Real Estate Installment Agreement. This type of Agreement is useful in situations where the Buyer can’t easily obtain financing from other sources or other financing may not be even available to Buyer. It allows the Seller to retain the title to the property and agree to transfer the title to the Buyer once all the payments under the Agreement are made and all other obligations are met. In essence, the Seller finances the purchase and holds the title or deed as security. When the Buyer completes the required payments, the Seller must deliver valid legal title by way of a deed. During the period of the contract, the Buyer makes installment payments on the purchase price and is entitled to possession and equitable title to the property. The Seller holds legal title and continues to be liable for payment of any underlying mortgage.

Generally, the closing costs associated with this type of transaction are usually lower than transactions involving mortgages, banks or other institutional type lenders. A Contract for Deed also allows Seller to gain interest income from the outstanding balance.

The law in some states require a seller to make additional written disclosures, including disclosures about the condition of the house and any known problems. Check with a real estate agent or attorney in your area to determine what additional disclosures, if any, are required in your state. In some of these states, a seller may still be required to make the disclosure, even if the property is sold “as is” If not required by law, a Buyer may still request the disclosures and try to make them part of the contract.. To find out if your state has any mandatory disclosure laws, you can check with a local real estate broker or attorney, or call your state’s attorney general’s office. Most states with mandatory disclosure laws have created state approved forms that can be used to make the disclosure.

Housing built before 1978 may contain lead-based paint. Lead from paint, paint chips, and dust can pose health hazards if not managed properly. Lead exposure is especially harmful to young children and pregnant women. Before selling pre-1978 housing, Sellers must disclose the presence of known lead-based paint and/or lead-based paint hazards in the dwelling. Buyers must also receive a federally approved pamphlet on lead poisoning prevention. An Environmental Protection Agency’s pamphlet entitled “Protect Your Family From Lead In Your Home.” can be found at:  http://www.epa.gov/opptintr/lead/pyfcameraeng.pdf and at http://www.hud.gov/offices/lead/outreach/leapame.pdf and. Additional information can also be found on the EPA site at: http://www.epa.gov. Please note that the state where the property is located may also have its own laws and regulations regarding lead paint. 

The Buyer and the Seller must make sure that all the terms of the Contract are fully understood. An attorney and a tax professional should be consulted to make sure all legal and tax consequences are clear.