Contract for Deed
A contract for deed, also known as an installment land contract and land sales contract, is an agreement to sell real property whereby the buyer pays the purchase price in installment payments, and the seller retains title to the property as security for the buyer’s obligation. Contracts for deed are both a sales contract and a financing vehicle that can be used in place of a deed of trust (mortgage). The seller is financing the purchase for the buyer under the agreement. While it is similar to a mortgagor-mortgagee relationship, no deed passes at closing, and the buyer does not have the same legal rights afforded a mortgagor under the deed of trust foreclosure statutes.
The buyer occupies the property under the contract for deed and makes installment payments until the entire purchase price is paid, at which time the buyer obtains a deed to the property from the seller. The contract for deed gives the buyer equitable title to the property and serves as a long-term financing vehicle. The seller retains legal title until it is time to convey the deed to the buyer under the terms of the agreement.
This type of agreement is governed by North Carolina General Statute Chapter 47H, entitled Contracts for Deed, if the property being purchased will be used as the principal dwelling of the purchaser, and there are five or more installment payments exclusive of the down payment. The contract must be in writing and state the parties, property description, purchase price, principal balance owed, interest rate, number of payments, the purchaser’s right to cure a default, and provisions indicating who is responsible for repairs, payment of taxes, insurance premiums, and homeowner association dues, among other items. (A complete list of the minimum contents for a contract for deed is contained in NCGS 47H-2.) A seller may not execute a contract for deed with a purchaser if the seller does not hold title to the property.
The seller must also provide the purchaser with an annual statement of account stating the amount paid under the contract, the amount still due, the number of payments remaining, amounts paid for taxes and insurance, any insurance proceeds received for property damage and how the funds were spent, and the outstanding balance of any lien secured by the property. If the property being sold is encumbered by one or more deeds of trusts or other liens securing a monetary obligation, the seller must notify the purchaser in a separate written disclosure that if the seller fails to make timely payments to the lienholder, the lienholder may foreclose on the property, even if the purchaser has made all payments. If a seller breaches his/her obligation to timely pay existing encumbrances, then the purchaser has the right to sue for damages or rescind the contract for deed and recover all sums previously paid, minus an offset for the fair rental value of the property during the period of purchaser’s possession.
Within five business days after the contract has been signed and acknowledged by both the seller and the purchaser, the seller shall record either the contract for deed or a memorandum of the contract at the register of deeds of the county in which the property is located. Unless the parties agree otherwise, the seller shall pay the recording fee. As with a residential option to purchase and lease agreement, the purchaser has a right to cancel the transaction within three business days following the execution or receipt of a copy of the contract, whichever is later. If the purchaser elects to cancel, then the seller must return to the purchaser within ten days any property exchanged or payments made, less any offset for the fair rental value of the property for the period of the purchaser’s possession and any sums required to repair damages to the property caused by the purchaser beyond normal wear and tear.
If the purchaser defaults on any obligation specified in the contract, and fails to cure the default after proper notice within the allowable time frame allowed (which must be at least 30 days), then the purchaser’s rights under the contract to maintain possession and complete the purchase of the property will be forfeited. However, if the purchaser will not voluntarily surrender possession and execute a mutual termination of the contract to be recorded at the county register of deeds, then a court order will be necessary for the purchaser’s rights under the contract to be terminated and extinguish any right of the purchaser to equity or ownership interest in the property.
Our next article will discuss advantages and disadvantages to the parties entering into a contract for deed transaction.