Contracts for Deed: Risks and Realities

A contract for deed or rent-to-own contract, also known as a “bond for deed,” “land contract,” or “installment land contract,” is a contract in which the buyer pays for land by making monthly payments for a period of years. The buyer does not own or have title to the land until all the payments have been made under the contract.

Under a contract for deed agreement, the buyer immediately takes possession of the property and begins making monthly payments directly to the seller while the seller retains the legal title to the property until the contract is fulfilled. When the final payment is made, the seller transfers the deed to the buyer, who becomes the new owner. If the buyer breaches or violates the contract for any reason during the payment period, the seller can terminate the agreement.

While a contract for deed may represent a simple transaction between two parties, significant risk can be involved.

Risks for Buyers

Greater risks are imposed on Buyer in a contract for deed. The biggest risk when buying a home contract for deed is that Buyer does not have a legal claim to the property until Buyer has paid off the entire purchase price. This means that if Buyer defaults and cannot make payments, Buyer loses the property and all of the money already paid into it. Unlike a traditional mortgage, a defaulting buyer in a contact for deed may only have 30-60 days to cure the default or move out. Another major risk is that the seller can still encumber the property with liens and mortgages as they are not required to transfer good clean title until the completion of all payments under the contract.

Risks for Sellers

The biggest disadvantage of a contract for deed for a seller is that Seller must wait until the contract is fulfilled to receive payment of the total purchase price. Other risks include: (1) the loan remains on a Seller’s credit report, (2) Seller is still liable for the loan, (3) risk of non-payment by the buyer, and (4) the buyer never goes through a formal application process like with a regular mortgage. In addition, Seller is still the legal title holder and if Buyer fails to keep the property up to code and follow ordinance requirements, Seller could be subject to fines, lawsuits and other legal problems.

If Buyer violates any terms of the contract and Seller wants to evict, Seller must give Buyer written notice by certified or registered mail. The notice must tell Buyer what he can do to remedy the breach. If the breach is for nonpayment, it must state what Buyer owes in principal and interest, additional charges like late fees, and the date of each missed payment. There are opportunities to catch up on payments or prevent eviction, but a positive outcome often depends upon the specific terms within the contract.

In Texas, contracts for deed on residential property are considered potentially predatory and subject to strict consumer-protection laws. Specifically, the Texas Legislature found that contracts for deed have long been disfavored because they encumber title without transferring title, cannot be sold in the real estate market, cannot be used to borrower money to make improvements, and are potentially abusive transactions under which legal title to homestead property may be withheld until many years after the buyer has built a home and made other expensive improvements. If you have entered into an agreement for a Contract for Deed as a Seller or Buyer, or have any questions or concerns regarding the risks of entering in a Contract for Deed, the attorneys at Waldron & Schneider are here to assist.

The legal information in this blog entry is not intended to be a substitute for seeking personalized legal advice from an attorney licensed to practice in your jurisdiction. Further, nothing contained in this article is intended to create an attorney-client relationship with any reader. This article and website are made available by Waldron & Schneider for educational purposes only and to give basic information and a general understanding of the law, not to provide specific legal advice. By using this website you understand that there is no attorney client relationship between you and Waldron & Schneider. The article and website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. For more information or questions you can contact us and one of our attorneys will be in touch soon.

Contracts for Deed: Risks and Realities

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