What is a Contract for Deed?
The Contract for Deed is a way to buy a house that doesn't involve a bank. Instead, the buyer moves in and pays the seller monthly payments. Once the house is paid off, the buyer gets the deed.
This is commonly used by people who cannot get a mortgage from a bank. However, a Contract for Deed gives you fewer rights and protections than a mortgage loan, so you should be careful.
Most Contract for Deed sales only need a small down payment. Be cautious with a Contract for Deed that asks for a big down payment.
What is needed for a Contract for Deed?
You must get a written contract that is signed and notoraized by both parties. The contract must clearly state the following information:
- Buyer's name
- Seller's name
- Legal description of the property
- Permanent index number
- Amount of the down payment
- Interest rate (an annual percentage rate)
- Monthly payment amount
- Late payment fees and grace periods
- Length of the loan in years and months
- Number of payments required
- Whether a lump sum ("balloon") payment is due at the end
- Who will pay real estate taxes
- Amount of insurance and property taxes for the first year
- Statement that the amount of taxes and insurance may change each year
- Fair cash value according to the property tax bill for the prior year
- Assessed value according to the property tax bill for the prior year
- Amount of real estate taxes for the prior year
- Amount of unpaid property taxes
- Annual insurance payment amount for prior year
- Type of insurance coverage to be required or provided
- Seller's interest in property being sold
- Any known limitations on the property (such as liens or mortgages)
- Statement about when the buyer will obtain the title
- Statement about who is responsible for making and paying for repairs
- Statement about what changes to the property must approved
- Due dates of additional charges or fees
- An amortization schedule
- Certificate of compliance with the building code
- Statement about the buyer's right to an inspection
- Statement that property was condemned if it applies
- Statement about what happens if buyer defaults in payment
The requirements listed above cannot be waived by the buyer or the seller.
Understanding your payments
It is very important to understand how much you will be required to pay each month. A portion of your monthly payment will be for interest. That means only a portion of your payment each month will actually be applied to the purchase price balance (or principal). You should also find out whether that monthly payment amount includes home insurance or property taxes.
Upon your request, the seller must provide an account statement that includes the following information:
- Amount of payment applied to the principle
- Other charges
The seller is not required to provide you with an account statement more than once every 12 months. If you request an account statement more than once in a 12 month period, the seller can charge you for it unless the contract has changed. The seller can only charge you for reasonable costs of copying and producing the account statement.
You should also understand whether the monthly payments will fully payoff the purchase price over the length of the contract. For example, if the contract lasts for only 3 years, but the payments each month are based on a 30 year repayment term, the monthly payments will not be enough to payoff the purchase price before the end of the contract. In this situation, a large lump sum (called a "balloon payment") will be due at the end of the contract. You should understand if a balloon payment is requried, and if so, how much it will be.
Should I record the Contract?
The seller must record the contract or a memorandum of the contract within 10 days of the date of sale at the county recorder of deeds where the property is located. If recording a memorandum of the contract, the memorandum must have the title "Memorandum of an Installment Sales Contract" in capital letters. The memorandum must include the following information:
- Address of the property
- Permanent index number
- Legal description of the property
- Buyer and seller names
- Date the contract was executed
- Notarized signatures of buyer and seller
Recording the contract helps protect you. You have the right to cancel the contract if the seller does not record the contract or a memorandum of the contract. You should still record the contract even if it states it "cannot" be recorded. Any provision in the contract that "forbids" you to record the contract is void. The Contract for Deed cannot prohibit you from recording it.
Who is responsible for repairs?
It depends on what you and the seller agreed to in the contract. Most of the time, you will handle all repairs after you buy the property. You have the right to hire a contractor and make repairs as you see fit. The seller may have to repair certain problems in the home that existed before you bought it if:
- The seller has agreed to make the repairs;
- The seller knew about the defects from city inspections and does not tell you; or
- The seller is guilty of fraud or misrepresentation.
A contract term that says you are responsible to make repairs for any condition that existed before the date of sale is void.
Sometimes a seller agrees to make repairs that are necessary to protect the seller's interest in the property. Before making repairs, the seller must give you at least 72 hours notice in writing so long as it is not an emergency.
Many houses have never been inspected. If the city found violations of a city code during an inspection of the house, the violations must be listed in the contract. If the seller does not tell you about the violations, you can call off the contract. You may also get some of your money back.
The contract should have a promise from the seller that the seller has not received notice of any code violations within that last 10 years. If notices of code violations have been received by the seller, the seller must disclose and list all the notices to you.
Fraud and misrepresentation
It is against the law for you and the seller to lie about anything concerning the contract or about the rights and responsibilities of the other party. If the seller lies about the home's condition to convince you to buy it, you may be able to cancel the contract. You may also be able to force the seller to repair certain problems. The written contract must include the seller's statements about the house.
Does the seller have to give me anything else about the condition of the property?
Yes. The seller has to give you a Residential Real Property disclosure. This form makes the seller tell you about any major defects in the property the seller knows about. If the seller says in the report that there is a major problem with the house then you have the right to cancel the contract. However, there may be major problems in the house that the seller doesn't know about or are not covered by the report. The report also doesn't require the seller to tell you about small problems.
I heard that I also get a lead disclosure form. What's that?
This tells you if the house has ever been inspected for lead paint. The seller also has to give you a pamphlet about the effects of lead. He has to give you ten days to inspect the house for lead paint. If you find lead paint, you don't have to buy the house. The seller doesn't have to inspect the house for lead, so there still may be lead paint in the house even if he says that the house has never been inspected.
Who is responsible for real estate taxes and homeowner's insurance?
It depends. The contract may specify that the seller will continue to pay taxes. Usually, however, the contract will require you pay for real estate taxes and homeowner's insurance on the property after the sale. You should make sure to pay the real estate tax and homeowner's insurance bills to the right place. Always remember to pay the bills when they are due.
Sometimes the buyer collects funds for property taxes and home insurance from the seller each month as part of the monthly payment. This is an "escrow" account. You should always verify that the seller is actually paying the property taxes and insurance premiums. If you have escrow including in your monthly payments, your payments may increase as insurance premiums or taxes increase.
Note: Sometimes the seller owes taxes for prior years. Before signing a contract, you should check to see if any prior years' taxes are owed. If there are unpaid back taxes, the Contract for Deed should specify who will pay them.
How can I prevent the loss of my home?
If you receive a notice of foreclosure or a court summons, you should contact a lawyer as soon as possible. Depending on the terms of your contract, and how much you have already paid, the seller will either have to file a foreclosure lawsuit or an eviction lawsuit to remove you from the property.
The process of foreclosure will apply if:
- The contract is more than 5 years in length; and
- The remaining amount owed is less than 80% of the original purchase price.
Remember, in order to calculate how much of the original purchase price you have actually paid off, you must know how much is applied each month to principal (not interest). Any down payments you made and the monthly amounts for principal should be included, but interest does not count. Be careful to calculate the amount owed and request a payment history from the seller.
If you fail to make payments under a Contract for Deed, the seller can end the contract. The seller must tell you that they want to end the contract. The seller must wait 30 days before trying to go to court and evict you. If you pay what is due within those 30 days, usually the case won't go to court. The contract will continue.
If the case does go to court, you will argue your case in front of a judge. The seller will also argue their case. If the judge rules against you, you may be given a short time to move. You may request the judge to "stay" (or "postpone") enforcement of the eviction and give you up to 60 days.
However, if you have paid-off 25% of the original purchase price, the judge will stay enforcement of the eviction and give you up to 180 days (no less than 60 days) to move. This period may give you a chance to keep the contract. If you pay what is due, you may keep the house and continue to pay according to the contract
Updated: February 2018