Contract for Deed

Advantages and Disadvantages

Advantages to Buyer

A contract for deed provides an alternative method of financing if a buyer is unable to obtain a conventional mortgage loan or does not have enough cash for a down payment.  The down payment in a contract for deed is often times lower than a conventional loan, and the closing costs will be lower as well because many of the fees of a conventional lender will be avoided.  Unlike a lease with option to purchase, the buyer may be able to take advantage of the usual tax deductions that an owner of real estate can claim.

Disadvantages to Buyer

There are several of disadvantages to a buyer who enters into a contract for deed.  If a buyer defaults on a payment under the contract, and is unable to cure the delinquency within the agreed upon time frame, the seller has the right to terminate the contract for deed.  The buyer will have forfeited all rights to the property and lose whatever equity the buyer had previously built, with no equitable right of redemption.  Meaning, there is typically no opportunity in a contract for deed for the buyer to pay the unpaid balance and keep the property, which is a right afforded to borrowers in conventional financing with a deed of trust foreclosure.

If the seller has a deed of trust (mortgage) on the property, and the seller defaults in their payments on that debt, then the buyer may lose the property even though they are current on their payments to the seller.  The buyer will however have the right to take legal action against the seller for damages and rescind the contract.

A contract for deed is not a common vehicle for the purchase of real estate in North Carolina.  It could be difficult for a buyer to explain to a third party, such a contractor for repairs, that he or she is indeed the owner of the property even though legal title has not been transferred by deed to the buyer.  Should the buyer wish to use the property as security to borrow money, lenders will be reluctant to accept the buyer’s interest in the contract for deed as collateral to secure the loan.

Advantages to Seller

It gives the seller an alternative way of selling real estate that might be difficult to sell by broadening the field of buyers to include those who would have otherwise been unable to qualify for traditional financing.  There also may be some tax savings flowing from selling the property in installment payments instead of realizing the entire gain in the year the property was sold.  The seller maintains title to the property as security.  If the buyer defaults, the seller may be able to both maintain clear title to the property free of any equitable interest of the buyer and also retain all payments previously made by the buyer.

Disadvantages to Seller

A disadvantage to the seller is that a contract for deed is frequently characterized by a low down payment and the purchase price is paid in installments instead of one lump sum.  If a seller needs funds from the sale to buy another property, this would not be a beneficial method of selling real estate.  Even though the seller maintains title to the property, the seller will need to file a legal action in the court to foreclose the buyer’s rights and obtain clear title to the property.  The legal fees and time frame for this process will be more extensive than a standard Power of Sale foreclosure.