[PLEASE NOTE: Attorney John Pitrelli continues his series on what home buyers and sellers should know about practical legal matters in the current real estate environment.]
This is a follow-up to my previous posts which dealt with common myths about the Contract for Deed method of owner financing. In this post I will discuss the advantages and disadvantages of the Contract for Deed.
The Contract for Deed will allow the sale of property when traditional forms of financing are not available to the Purchaser.
Unlike lease options or lease purchasers the sale is final when the Contract for Deed settlement documents are signed. This
can be extremely important for the parties who may wish to trigger time frames for capital gain rollover or exemptions.
With Contract for Deed financing closing costs are significantly less, since there is no Deed of Trust to record, no points to pay or other lender fees. The Seller may be able to take advantage of a low interest loan they have secured by the property by wrapping that loan at a higher rate.
Perhaps, the greatest advantage is the Purchaser receives the tax benefits (deductions) of home ownership, thereby making a slightly higher payment affordable when comparing ownership under a Contract for Deed to renting.
As to disadvantages, the Seller remains liable on the underlying debt which may impact the Seller’s ability to procure new financing on a future purchase. There is also a remote possibility that the underlying lender my consider the Contract for Deed as an event that triggers the due on sale clause and they elect to accelerate the loan.
A disadvantage for the Purchaser is the cost of a subsequent refinance of the property.
I have had considerable experience with Contract for Deed financing over the past 30 years and it has proven to be very successful for the majority of my clients. I do believe however that a Contract for Deed should be used sparingly and should be reserved for special situations. The parties to the transaction must be comfortable with the ability of the Purchasers to perform and the credibility and trust worthiness of the Seller. Above all, the parties should be fully advised about the risks of the transaction and should seek legal counsel as Contracts for Deed do involve risks to both the Purchaser and Seller.
[John welcome questions or comments. You can contact him at j.pitrelli@keytitleva.com]