Benefits to the Buyer
This type of arrangement is attractive to buyers who might not otherwise quality for a loan. In many cases, a buyer will enter into such a contract because, without such an arrangement, they would not be in a financial position purchase the property. The buyer may also be able to purchase the property with a relatively low down payment. Also, in the event of a default in payments, the buyer need only bring payments current within the time period provided by state law to preserve his equity in the property. This is in contrast to most promissory notes containing acceleration clauses, in which upon default the buyer is responsible for the entire amount remaining under the loan. Contracts for deed are also faster and less costly to finalize than traditional mortgages discussed above. Closing costs, origination fees, and application costs are nonexistent.
Risk to the Buyer
A contract for deed does not come without risk for the buyer. Because the seller keeps legal title to property until the contract price is paid in full, the buyer does not become the owner of the property until he completes his payment obligations and receives title from the seller. If the buyer defaults on the contract, the buyer runs the risk of losing all of the money that he has paid on the contract.
Benefits to the Seller
At least on the surface, the contract for deed is attractive to seller because is relatively simple to understand and appears to afford the seller a quick method of canceling the transaction in the event of a default.
Termination of Contracts for Deed
In general, if the buyer defaults on an installment, the seller (also known as the vendor) can cancel the contract, retake the land, retain the payments made and benefit by any improvements that have been made on the premises by the buyer (also known as the vendee). The seller may do this without a foreclosure sale or judicial action. The seller may alternatively elect to sue the buyer on the contract.
Risks to the Seller
Contracts for deed also places some risk on the seller. The seller runs the risk of not completing ridding itself of the land for many years. If the buyer defaults, the seller will have to take action and may end up taking back the land.
The buyer must record the contract for deed with the county recorder where the land is located within four months after the contract is signed. Contracts for deed must provide the legal name of the buyer and the buyer’s address.
Contractual Rights and Remedies
The contract for deed is a contract and many of the rights and remedies of the parties are based solely on the provisions contained in it. Provisions such as the time, the place and the amount of payment indicate the continuing contractual relationship between the parties. The seller agrees to convey the property to the buyer by a specified form of conveyance, usually a warranty deed, once all of the payments are made under the contract, and to furnish an abstract evidencing good title in the seller at the time the contract for deed is executed.
The buyer agrees to pay a purchase price for the property as specified. He also agrees to pay real estate taxes and assessments and to maintain insurance on the premises, including insurance for the benefit of the seller. The buyer also agrees that all buildings and improvements currently on or subsequently added to the land may not be removed, but will remain on the property until the contract is fully performed.
Many other provisions, such as due on sale clauses, contained in a contract for deed are similar to those contained in a mortgage. It may, however, be more common to find a provision in a contract for deed that prohibits the purchaser from prepaying all or any portion of the contract ahead of schedule. The seller may be looking to the contract for deed payments as a source of retirement income and may not desire early payment.
Acceleration clauses are much less common in contracts for deed. There is, however, no legal restriction against including an acceleration clause in a contract for deed. Without an acceleration clause, if a seller wants to forego his claim against the land, he must bring an action for each installment as it comes due under the contract for deed. He cannot accelerate the balance due under the contract.
Nature of the Relationship
Under a contract for deed, the buyer does not own the land but rather acquires an equitable estate in the land. This allows the buyer to occupy and farm the land. Although it is generally considered that the seller retains legal title to the land and is so treated for many purposes, the courts have consistently held that the seller has a security title only and that the buyer is the equitable owner of the property. As such, the relationship is in substance similar to that created by a deed and a mortgage.
Completion of the Contract
When the total purchase price has been paid to the seller, the buyer is entitled to the type of conveyance provided for in the contract. Generally this will require the execution and delivery of a warranty deed to the buyer. When the title to real estate is transferred by a warranty deed, the seller is guaranteeing that he has full legal title in the property subject only to those exceptions specifically noted on the deed. In contrast, a quit claim deed transfers all rights in the property of the seller, but provides no guarantee that others do not have prior claims. Once the purchase price has been paid, the seller must convey legal title to the buyer. If the seller has died or is otherwise unable to make the conveyance, it is the duty of his heirs or representatives to furnish the proper conveyance without any additional cost to the buyer. When the buyer has received the deed from the seller, he should file the deed with the county recorder in the county where the land is located.
As noted earlier, improvements a buyer makes on the property may be lost if he defaults on the contract. In the event the buyer plants crops, the crops may likewise be lost if the seller terminates the contract for deed. It is therefore important for a buyer of farmland to make provisions for paying the contract installments during the time that he has growing crops on the land. Otherwise such crops could be forfeited to the seller.