Author Topic: Contract for deed: Anyone with real-world experience?  (Read 1020 times)

Kris

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Contract for deed: Anyone with real-world experience?
« on: December 05, 2019, 10:13:39 AM »
A less financially-savvy family member recently asked me for advice concerning a house they are considering purchasing from another family member on contract for deed. I have absolutely no experience with doing this, and my first reflex to hearing those words is warning sirens going off in my head. I've been reading up on the pros and cons of doing CFD, but I was hoping to get some solid perspectives from this forum on the whole concept. Basically, what I'd like to know is, is CFD:

- Holy shit, it's a horrible idea and here's why
- Could be good depending on the situation
- It's a good deal for the seller (or buyer) but not so good for the buyer (or seller) because XYZ

I'm just looking to round out my understanding of the whole process.

Note: I want to pre-empt any responses of "Tell this person not to do this!" by saying: please don't bother replying with that. Not that I wouldn't want to hear it if I were asking for myself, but because this person is not going to take advice like that. What I want are actual pros and cons, and suggestions/caveats/pro tips for someone who is interested in doing it. I might be able to convince them not to do it (though probably not), but only if I could put together a solid enough "con" package. More than anything, I want them to approach it with their eyes open if they are determined to do it. So, if you are hard-line against CFD, give me the reasons. Thanks!

Pre-emptive edit #2 (lol): I also want to repeat that this person did specifically ask me for advice, so I'm not butting in. But I know them well enough to know what kind of advice they will and won't take.
« Last Edit: December 05, 2019, 10:20:40 AM by Kris »

terran

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Re: Contract for deed: Anyone with real-world experience?
« Reply #1 on: December 05, 2019, 11:43:24 AM »
I didn't know what this was, so I googled. Sounds like it's another name for rent-to-own.

I found this which seems like a well balanced looks at the pros and cons for both sides of the transaction: https://www.minneapolisfed.org/article/2009/risks-and-realities-of-the-contract-for-deed

Kris

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Re: Contract for deed: Anyone with real-world experience?
« Reply #2 on: December 05, 2019, 12:19:12 PM »
I didn't know what this was, so I googled. Sounds like it's another name for rent-to-own.

I found this which seems like a well balanced looks at the pros and cons for both sides of the transaction: https://www.minneapolisfed.org/article/2009/risks-and-realities-of-the-contract-for-deed

Thanks. I've been reading similar pro and con articles, but not this one yet.

Cb1234567

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Re: Contract for deed: Anyone with real-world experience?
« Reply #3 on: December 12, 2019, 05:47:00 PM »
My own experience is that the problem is the buyer canít qualify for a loan, else why would the seller bother with it??  ( no, Iím not actually asking why ;) What Iím saying is that so many people are overextended w/o realizing it, and a seller just wants out with some payments because CFD is ďeasierĒ. Whammo, 3-5 years later, shockingly, issues arise and it falls apart.

In this case, why be in debt to family? What if they need money later or some such...and they start eyeing the friendís CFD deal as a problem- ď oh, if only we could just sell the old place and be done with it.Ē Loí and behold, friend has 4 kids, bad credit, and not a prayer of financing out of the CFD. Voila. Issues. Had nearly this exact conversation less than 90 days ago with family.

Also, I would not expect to get a good buy on CFD because itís seller financed. They have all the cards. Are they skipping the inspection and appraisal, too? Is it discounted accordingly?

merince

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Re: Contract for deed: Anyone with real-world experience?
« Reply #4 on: December 16, 2019, 10:57:34 AM »
To make it really simple: the contract has the buyer pay market rent (because they live in the premises) plus a small amount that goes towards "downpayment".

Pro: forced savings for a downpayment.
Con:
  • If for whatever reasons you cannot make the payment + extra, you end up evicted.
  • Ideally, the landlord would hold the extra in an escrow fund. This does not always happen.
  • The landlord controls the price of the property.
  • Those types of contracts are usually 2 years. To make a 20% downpayment on a 100K house, the extra would be about 833 over normal rental rates. Anything else would be pretty much whistling in the wind.

Suggestions:
  • Make sure the landlord uses a payment service like cozy that reports to the credit bureaus to improve the buyers' credit score.
  • Sign a regular rental contract/lease for 2 years.
  • Sign a right of first refusal with the landlord. Those usually cost about $100
  • Calculate how much you need to dump into a savings account each month to raise the downpayment in 2 years, then do it
  • Make an offer in 2 years if you still love the house or pick a better one

Michael in ABQ

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Re: Contract for deed: Anyone with real-world experience?
« Reply #5 on: December 16, 2019, 11:24:39 AM »
I've dealt with these for commercial properties. I've seen many cases where a property sells, the buyer defaults, and it sells again. Sometimes this can get repeated 2, 3, even 4 times over a few years if it's a type of property that attracts a lot of unqualified buyers - i.e. recreational land.

There are a couple of issues that generally make them bad for buyers.

1. Interest rates and terms are generally worse than what can be obtained on the open market - i.e. a 10-year loan with a balloon payment at 6% interest when market is a 30-year loan at 4.5%.

2. What happens if the seller dies, or gets sued? Will their heir or estate honor the contract? Does the buyer have the means to take them to court to enforce it? In most cases title to the property does not pass from seller to buyer until the contract is paid in full. Until that happens that piece of paper doesn't mean a whole lot unless it's well written and backed up by an attorney (who won't be cheap).


Catbert

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Re: Contract for deed: Anyone with real-world experience?
« Reply #6 on: December 17, 2019, 12:14:05 PM »
I'll give you a real life success story.  An old story (~50+ years ago).  I'm assuming that a Contract for Deed is the same as a Land Contract.

One one side you have my mother:  recently divorced, 5 kids, ex in the wind,  no credit, working for the first time since marriage.  On the other side you had a builder: built cheap, crap houses and got the houses back after the slabs cracked.

Builder rented one of the returned homes to Mom for a couple of years.  Eventually they did a land contract.  Mom paid faithfully for 10? years and got title when it was paid off.  She lived there until she died.  The most recent sale was last year for 435K which tells you a lot about So Cal real estate costs.   I'm guessing the slab is still cracked.

Generally the advantage is to the seller b/c if buyer defaults it is much easier to evict rather than foreclose.  Can be dangerous for the buyer b/c seller could take loans out w/o the buyer knowing.




ketchup

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Re: Contract for deed: Anyone with real-world experience?
« Reply #7 on: December 17, 2019, 01:07:31 PM »
I did it once.  My GF and I bought our first house on a contract-for-deed.  She was 19; I was 20.  The house was 18.5k in 2012.  The term was five years. 25% down.

The house had been on the market for a long time (because 2012), and the price was low enough that most banks wouldn't consider a mortgage on it.

Cue some young idiot with minimal credit history deciding to buy the cheapest house within 25 miles (it worked out, but that's a bad tactic for what I hope are obvious reasons), and this was the suggested option by the realtor.  I wanted to pay cash but the realtor talked me out of it (would have been ALL of our cash at the time and that would have been supremely stupid).

Seller was super excited to get rid of the house, was super cool about the whole thing.  Realtor drafted up the contract, a RE lawyer reviewed it, and we signed and I gave him his cash for the down payment (literal cash because I was too dumb to get a cashier's check), gave me the keys, and we were golden.   Paid it off five years later, got the deed from the seller and we went on our merry ways.