When Is a Contract for Deed Used?

• A contract for deed, also known as a "land deed" or "installment sale agreement," is a private arrangement between two parties in which a seller, rather than a lending institution, finances a loan for a buyer to purchase real property. The buyer might have poor credit and be unable to obtain a conventional loan for this reason, or he might not have a substantial down payment to put down on the property. Sellers who must sell property quickly may opt for a contract for deed, since this is quicker than waiting for a buyer to obtain a loan.
  
  

Contract for Deed

• The sale price of land under a contract for deed is paid in regular installments. Over time, the buyer acquires increased equity in the land. Each installment payment is composed of money that is paid toward the purchase price of the property, as well as interest on the purchase price. In this respect, an installment payment is very similar to a mortgage payment.
  
  

Contract for Deed and Granted Deeds

• If a buyer purchases land through a contract for deed, the title to the property is retained by the seller and not transferred to the buyer until the last installment payment is made. When a buyer obtains conventional financing to purchase property, the title is conveyed by a deed, usually with warranties. However, until receiving the title, the buyer can only take possession of the property and make improvements to it.
  
  

Sellers: Pros and Cons

• At first glance, it may seem that a contract for deed gives most benefit to a seller. Not only does the seller get the purchase price on real property, he also gets to collect interest. However, the seller must have a great deal of trust in the buyer. If the buyer could not get conventional financing, this is an indicator that a bank considered him a loan risk. If the buyer cannot make payments and the seller counted on those payments to supplement his living expenses, the seller may find himself out of luck if the buyer doesn't make payments.
  
  

Buyers: Pros and Cons

• Buyers must also have a great deal of faith in the seller. As the buyer does not hold title, any number of things could happen while the property is being paid for under a contract for deed. The IRS could levy the property or a creditor could file a lien in the property records, and the buyer may be the last to know. Some contracts for deeds are written so that if a buyer is in arrears in an installment payment even once, he loses all equity in the land and ends up with nothing.