A contract for deed is a contract between a buyer and a seller where the seller is providing financing to the buyer. There are variations to this when an investor participates as a third party buying the CD terms from the seller for a discount.
A seller may want to consider contract for deed terms for a variety of reasons. It can be a good investment, it can be a means to an end, it can be a way to help a friend or family member purchase a property. When the seller offers CD terms there will not be a mortgage on the property or the lender has agreed to the CD. In cases where there is a mortgage with an acceleration clause, an attorney should be consulted.
A buyer considers CD financing when they are unable to use conventional financing. As lenders tighten their requirements CD financing has become more commonplace. Some examples of buyers include buyers who are self-employed and buyers who may have a property to sell. Buyers should meet with a lender prior to signing a CD if their goal is to transition to conventional financing at a later date.
When writing a CD, a Realtor uses CD forms from the MLS. The main terms that both parties need to align are include:
- Sale price
- Downpayment – This will be a percent of the sale price, often 20% or more. A downpayment less than 20% poses additional risk to the seller. The CD forms include language for a credit check contingency, such that the seller can review the credit of the buyer.
- Interest Rate – The negotiated IR will be more than the IR on a conventional mortgage. In Minnesota, CD rate information is provided monthly by calling 651-297-7053. The max CD rate for April 2011 is 8.640%. The max rate is +4% of the Federal National Mortgage posted yield for a standard conventional mortgage as posted in the WSJ 2 months prior (in February). This information is updated monthly.
- Time horizon – This can vary from 3 to 30 years. In most cases, a buyer is using a CD as a stop-gap to get into a property with the intent of qualifying for conventional financing at a later date. The time horizon in these situations will be 3-5 years where the buyer has agreed to pay the seller a balloon payment at the end of the contract.
There are templates available on excel and numbers (apple) that you can use the inputs above to determine the payment schedule, annual interest and final payoff amount. These templates are a useful way of getting all parties on the same page with terms.
Entering into a CD contract poses risks for both the buyers and sellers. A Realtor can help facilitate the transaction and will recommend that attorneys and accountants are consulted prior to signing.
Once executed there are strategies that can be put in place that protect both parties and make the interaction seamless. Let me know if you would like to discuss contract for deed financing for the purchase or sale of a property. Ingrid – ifriel(at)therealtyhouse.com