Guests - If You want access to member only forums on HSO. You will gain access only when you Sign-in or Sign-Up on HotSpotOutdoors.

It's easy - LOOK UPPER right menu.

Sign in to follow this  
Followers 0
huntingislife

Contract for Deed- How does it work?

14 posts in this topic

We are looking into buying some land and have noticed several sellers offering contract for deeds. How does this work? How would payments compare to a conventional loan?

Share this post


Link to post
Share on other sites

A contract for deed means that you are borrowing the money from the seller and using the property as the collateral.

How you calculate interest is determined by how you agree to calculate interest.

I sold a house on a contract. The two of us sat down and wrote our own contract. We used forms drafted by an attorney that we purchased at a local office supply retailer.

First - a purchase agreement.

The purchase agreement spells out some details involved prior to closing on the actual contract. It basically identifies what we agreed to.

For example, it records details about earnest money.

1. Was earnest money put down?

2. Is the earnest money refundable?

3. If refundable, under what conditions?

4. Is the earnest money applied to down payment if the purchase goes through?

The property tax was an item on the purchase agreement.

1. Will one party pay the tax for the sell year or will it be pro-rated?

2. If pro-rated, how is it calculated?

Other things are included like

1. Details about the title. Who is responsible for cost of title search and making sure of clear title.

2. The abstract. When is it to be delivered to the buyer and who is responsible for the cost of bringing it up to date.

3. How long is the purchase agreement valid?

4. Can the seller sell the property to someone else while the agreement is valid?

3. Other things that elude my memory right now.

Basically it spelled out the details of the purchase that we agreed to.

Next, the contract

The contract spells out the details of the loan.

What is the interest rate?

How is it calculated?

What is the payment going to be?

When is the payment due?

What is the length of the contract

In our case, we set up ten year ballooning contract, which means the balance is due in full after ten years.

We use simple interest where each month we take the anual percentage rate divided by 12 times the unpaid balance for the month. APR / 12 * unpaid balance.

I am now considering offering them the opportunity to lower their interest rate a percentage point and prorating it back to the beginning of this year. They have been extremely prompt with their payments and I'd like to reward them in this way.

Our contract comes due next February and I'm also considering an offer to extend the contract rather than make them pay the balance in full.

Hope this is helpful.

Bob

Share this post


Link to post
Share on other sites

Thanks Bob. In general, are interest rates lower or higher than a typical loan?

Share this post


Link to post
Share on other sites

Typically, I believe the interest rate on a C/D is higher. Sellers are not banks and probably don't have the capital to support contracts. I believe there is a law in MN that limits how high the rate can go but I don't recall what it is.

Ultimately, as a seller, I would not enter into a contract without requiring money down. In my case, I asked for 10% but that might be a bit low. The market was poor for the house I was selling and I was interested in getting it off my books.

The down payment serves a few purposes.

1.

It can go a long way toward confirming the buyer's committment.

2.

If the buyer goes into default, he's got something significant to lose so it makes him more likely to pay.

3.

If the buyer goes into default, you'll have the cost and pain in the butt of foreclosure, cleanup, repairs, and resell. The downpayment should be high enough to offset this.

Final comment. I am not in real estate and I am not an attorney. My comments are purely from my own experience. I have purchased a house on a contract and sold a house on a contract and both interactions went very well.

Bob

edit: One other thought. If you're looking at buying/selling land, most banks hesitate to lend money for land because land by itself is typically not considered adequate collateral. Just food for thought.

Share this post


Link to post
Share on other sites

Also its for someome who can't get a loan.

Share this post


Link to post
Share on other sites

I guess if they can't get a loan from a lending institution, and I know this up front, be darned they would get one from me if I were selling. Too risky for a bank, certainly too risky for me.

Bob

Share this post


Link to post
Share on other sites

C/D where popular during the early 80's.

Share this post


Link to post
Share on other sites

Bob has things spelled out pretty well. I bought my first house on a CD. Things were going OK until I got the payment book back one time and found a page of entries had been erased and re-written. The seller had allowed a real estate company to act as the servicing agent. I then found out that they had not been putting the tax and insurance escrows into a bank account as was required by law. I bailed on that deal by borrowing the money from a relative and then getting a conentional loan.

My daughter had a CD on her house and there always was an issue at the end of the year on how much could be claimed as interest expense for income tax purposes.

You could avoid the second problem most likely by just going to a HSOforum and doing an amortization table and agreeing in the contract that it is the basis for allocating payments to principle and interest. On the escrow problem - I guess if I was buying I would want to be able to make a check out twice a year payable to the registered owner and the county and send it to the registered owner a few weeks before the payment was due. That way they would know that the payment had been made.

It seems to me that having a short term CD with a balloon makes sense. Things change and you never know when a death or a divorce or something is going to come into play. With a shorter term you lessen your exposure. Hopefully after 5 years or so you'd have enough equity to get a conventional loan.

Be sure to have a clause that sets what the buy out amount is. You'll never be able to figure it out as closely as a bank does when you ask for a pay off on a home mortgage, but you want to have something that sets out how it is going to be calculated. Banks do it by determining the daily interest amount. Good luck with that calculation.

I can't remember if BobT suggested it but be sure to register the contract for deed with the county. It will cost you some fees but it puts the world on notice and would prevent the fee owner from using it as collateral or selling it to someone else.

If you're talking enough money that you pucker up thinking about it you probably should fork over some bucks and have a real estate lawyer look at it. Spending $500 now may save you from further problems, like learning that the place is a hazardous waste site or something. Going cheap isn't necessarily best when it comes to this sort of stuff.

Share this post


Link to post
Share on other sites

on a contract for deed the title stays in the sellers name until the final payment. Therefore if the buyer fails to pay it is quicker and easier to take control of the property and cancel the CD. You should always have an attorney do an opinion so you know you are purchasing a clean property. IF the seller has a mortage on it you should have the payments sent to the mortgage holder and applied to his loan the the balance sent to him of each payment. The opinion would help with this.

Share this post


Link to post
Share on other sites

My Grandmother sold her WI farm to a neighbor around 1980 on a CD for $10,000 down and $30,000 per year for 3 years. He missed the first payment and she extended him for 2 months. Still no payment so she contacted her lawyer and he started writing letters and charging her $50 per letter. She wouldn't forclose on the buyer becasue he was a family friend. She finally got the 1st payment about 9 months late. Of couse the same thing happened on the 2nd payment and I begged her to forclose, but she wouldn't. She got the last payment about six months late. Some years later after she passed away, my brother and I were settling her estate when we learned her lawyer was representing both her and the buyer and it was the lawyer who fronted the buyer the money for the last two payments.

Share this post


Link to post
Share on other sites

I hate to say this ,BUT, you need to take legal action against that slimey lawyer....He is in violation of his code of ethics and the law....You will surely win.

Share this post


Link to post
Share on other sites

No forclosure on a contract for deed I believe. The seller keeps title to the property in some fashion until the purchase is paid for. So if you violate the contract by not making the payment as called for, then the seller can take it back without all the foreclosure mumbo jumbo.

We bought our cabin on contract for deed years back. Loans were hard to get in the 80's

Share this post


Link to post
Share on other sites

given the current situation, how could anyone recommend a short term loan with a balloon? Far better a long term with no prepayment penalty or only a small one.

Being under the gun to refinance has cost many their homes.

Share this post


Link to post
Share on other sites

Bob T. explained a CD about as well as it can be. I do want to recommend that you hire a good land attorney. You can't get the type of advice you need from Office Max. I've purchased several properties with the use of a CD and they have all worked out good for me, but they were not without problems.

Real estate deals are complicated and fraught with potential snags. Don't go near this deal or any property deal without doing your due diligence. $500 to $1000 in attorney fees can save headaches that cost a lot more. Run into a problem with a property deal and that initial attorney fee will look like the cost of a tootsie-pop.

About 15 years ago I was going to purchase some raw land from a guy near the Lake of the Woods. Being that banks don't want to finance land deals I requested and he offered a CD. I had an attorney draw up the papers and do a deed/title search of the abstract. Turned out that the property deed was in the name of his dead father. I called the guy and told him he would need to have the deed transferred into his name and then we could do the deal. He said that property was willed to him and his brother. Both were willing sellers, but there was sister of record who lived in Texas. You know where this is going. I told him that I'd like to buy the property and asked him to call me when he got a clear title. About a year later I was driving back from Lake of the Woods and I noticed the same property was for sale again. I called the guy and told him I was still interested and asked if the title was clear. After a bit of mumbling he told me the property was off the market. So buyer beware.

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now
Sign in to follow this  
Followers 0



  • Posts

    • nice story, fishing has a way of easing the pains we have. even when we hurt like crazy when done for the day we are looking forward to the next outing.
    • way to go, guys yep, the toms not about to give up even though its close to closing time have seen several strutters the past couple weeks and heard gobbles yesterday while fishing
    • great job. makes it 5 for 5 for team 5 congrats on a nice tom, 57 and that willl give our team score a boost
    • One More Cast      Photo by:  Roger Abraham   If any of you out there are regular readers of my tales, you have followed my recent struggles with back and knees.  I can’t put a name to this drive I have to be on the stream as of late.  It borders on obsession. I guess in my mind if I am healthy enough to fish the world is right with me and I am not getting old and feeble.      Today I was a witness to that I am not the only one.  Lots of anglers and hunters live to go out into the outdoors. .  It is what drives them.  It makes them feel alive.  It is their passion.  I told my fishing buddy Abe today my thoughts.  I told him how I was feeling a little old.  I guess my 60th birthday coming up next month makes me feel mortal.  Abe laughed and said I was a young buck compared to him.  Abe turns 76 this year.     Abe told me tales about catching big trout in tiny streams in Wisconsin and out west.  The twinkle in his eye when he reminisced I had seen before in many trout anglers.      We fished a stretch for 2 hours.  I sat down and rested often.  Abe kept on fishing. He got hung up in a box elder branch and lost a lure.  Abe told me box elders trees were his nemesis when he fished.   He asked me which tree was my kryptonite.  I told him, "ones with branches."  We both had a chuckle and continued fishing.   I thought to myself this guy is really driven.  I hope I am like him at 76.     We got to the vehicle and Abe wanted to continue fishing.  Abe’s waders sprang a leak earlier and he fell in the water a couple times.  He was quite wet.  He wanted to change in to dry clothes before we continue.  Abe peeled off his wet shirt and there were two things stuck to his chest.  He could tell by my questioning look he needed to tell me what was up.     Abe told me he had been having heart problems lately and he was supposed to be wearing a heart monitor.  He left it in the car because he was afraid of getting the electronics wet.  Here I have been whining about being old and the guy I was fishing with left his heart monitor in his vehicle.      Abe reassured me that he was in no danger and he could continue fishing.  I started brainstorming on a place to fish where it was not so hard walking.  Now that I knew he was not as healthy as he looked I wanted an easy place to fish.  I knew the place and it was upstream 5 miles.     We arrived at the well manicured field.  It looked like a golf green.  I picked the area because the farmer kept sheep and goats on the land and the weeds and brush were gone because of the goats.  We walked and fished.     Abe told tales of the old days and of fish lost and landed.  I walked a little forward to fish and looked back to check up on Abe.  What I saw when I looked back scared me and I immediately asked Abe if he was ok.  Abe was laying flat on the ground face down.  I thought the worst and he could tell by my face.  He told me to calm down.  His back was acting up and he needed to straight it out and that was the best way to do it.   We fished a little bit more and he took a photo of me.  He liked the lighting. He told me it captured the essence of trout fishing.  He did not have a camera.  I let him use mine.  He was not camera savvy and needed an impromptu lesson on how to use it.   We drove to his car and we talked about our love of the outdoors. We shook hands and headed our separate ways and promised to fish again soon.  As I drove home I smiled and thought about how I am going to be when I am 76.  I hope I am like Abe and my eyes still twinkle when I talk of chasing trout and I am still driven to make one more cast.
    • The past week has had me having multiple close calls and missing a brute at 45 yards.  Tonight I talked my dad to give it another try and there were birds in the field when we got there.  Birds ended up leaving as we tried to sneak in.  A short 20 minutes later they were back and we watched and worked the big group of toms and hens for more than 2 hours before we got one to commit.  Dad shot him with his 20 gauge at 48 yards,(this thing shoots an awesome pattern).  The 3 year old was down and only flopped a few times.   Nice 1+ inch spurs, 10" beard and heavy.  A good evening for sure!
    • Sorry to disappoint guys, but this tom was not my first bird of the season. Apparently that's part of the rules. The score won't count towards the team. I don't have any measurements for the jake I shot so we will have a zero from me.    At least my freezer is full. 
    • Way to  go 1957 !! Congrats!!
    • sugar is not a drug. 
    • Another good day today out on Superior ,,,, Had my first double and triple in the new rig today ,,, the day didnt start out with perfect weather but the fishing more then made up for it ,,, The mud  covers a lot of water but fishing the tea  colored water and edges of the mud paid off ,,, the cohos grew 5 inches  from eating this years smelt,,,, had some go 23 inches today 
  • Our Sponsors