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Contract for Deed

Is someone offering to sell you a home on a contract for deed? Know the risks.

A contract for deed (sometimes called an installment purchase contract or installment sale agreement) is a real estate transaction in which the purchase of the property is financed by the seller rather than a third party such as a bank, credit union or other mortgage lender. It is often used when a buyer does not qualify for a conventional mortgage

Instead of purchasing a home with a mortgage, the buyer agrees to directly pay the seller in monthly installments. The buyer is able to occupy the home after the closing of the sale, but the seller still retains legal title to the property. Actual ownership passes to the buyer only after the final payment is made. 

Contracts for deed have long been a financing option for property transactions between family members or friends. Some nonprofit housing organizations also use them to help low-income families find a path to homeownership.

But in the wake of the 2008 financial crisis, some real estate investment companies have bought up foreclosed homes and then offered them on contract for deed to low-income buyers or those with poor credit scores who cannot secure traditional mortgage financing.

Contracts for deed are also a favorite trick used by real estate scammers who will either “churn” a property through multiple would-be homebuyers or collect payments from a buyer while letting the property go into default with an unpaid mortgage.

While a contract for deed can sometimes benefit a buyer with no other avenue to homeownership, it is a high-risk option that is subject to abuse and predatory practices. It also lacks many of the consumer rights and protections available under state and federal laws for homebuyers who have traditional mortgages. If the buyer fails to make a payment or is in default on other conditions of the contract, the seller can cancel the contract, evict the buyer and quickly reclaim the property without a foreclosure sale or judicial action.

A contract for deed can appear simple and straightforward, but this financing option can pose a number of pitfalls for a homebuyer. Many buyers with contracts for deed never become full owners of the property and they lose all the payments they made toward ownership.

Before signing a contract for deed, prospective homebuyers should make sure they fully understand the extent of their obligations under the contract, all of the costs they will be responsible for and the risks they are incurring, including how quickly they can lose the home and all the payments they have made.

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