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What Is a Contract for Deed and How Do They Work?

What Is a Contract for Deed?

A Contract for Deed is a tool that can allow buyers who either don't qualify for traditional lending options or who want a faster financing option to purchase property.

 

How Does a Contract for Deed Work?

Under a Contract for Deed, the buyer makes regular payments to the seller until the amount owed is paid in full or the buyer finds another means to pay off the balance. The seller retains legal title to the property until the balance is paid.If the buyer defaults on the payments, the seller can repossess the property.

 

In some states, a seller who repossesses a property must reimburse the buyer for the fair value of improvements to the house, as well as a reasonable amount for rent.

 

Can the Contract Be Changed?

Yes. Typically, these contracts can be renegotiated so long as both parties are willing.

 

How Long Does a Contract for Deed Last?

The average length of a Contract for Deed is five years, but it can be for any amount of time that the buyer and seller agree on.

 

Forming a Contract for Deed

The process typically starts as a negotiation between the buyer and seller. Generally, stock and boilerplate terms cannot apply. Interest rates on a Contract for Deed are not regulated, so they can be as high or as low as the buyer and seller can agree on. Similarly, the payments can be structured in any fashion that is agreeable to both parties. In some cases, the value of the house may be divided into equal payments so that the full balance is paid off by the end of the term. In others, regular payments are set up with the balance coming due in a balloon payment at the end of the term.