Real estate investor forum

In representing real estate investors for 20 years we have seen every conceivable kind of real estate transaction. We are proficient in handling “non-traditional” vehicles for buying and selling real estate. In this post, we will cover the Installment Sale or “Contract for Deed”. What is it and how does it work? An Installment Sale or Contract for Deed involves a seller (usually the investor) financing the acquisition of property for a buyer (often a tenant in place) while still retaining title to the property. The parties sign an installment sale contract and promissory note covering all mechanics and financing terms (down-payment, interest rate, term and payment amount). The seller signs a deed that is held in escrow until the installment obligations are paid in full. We often record a memorandum of contract to give the buyer some security while holding a signed release of the memorandum that can be recorded in the event of default in order to clear title for the seller/investor. The buyer has all rights and responsibilities of ownership. The buyer normally must maintain the property and pay all expenses (taxes, insurance, HOA dues, etc.). The seller, however, retains record title so that if the buyer defaults the seller can evict the buyer (rather than having to foreclose on the property if the transaction had been a sale with traditional seller financing). The seller’s existing mortgage can stay in place because title has not been conveyed. The buyer can essentially finance the acquisition without a traditional mortgage, thus saving lender fees and other transaction costs. In addition, they can build or rebuild their credit during the installment term. The arrangement is ideal for 2-5 years. The buyer then refinances the property when the balloon comes due, the seller is paid off, and the deed is recorded at that time. In most cases lenders will treat the transaction as a refinance rather than a purchase, which should allow the buyer to borrower based on the appraised value rather than the initial purchase price. The terms of these deals vary widely. The seller/investor will normally want to get a sizable down-payment (which is normally non-refundable) to protect against damages and loss of income if the buyer defaults. The financing terms are subject to negotiation but usually involve a higher interest rate than a traditional mortgage. However, the buyer still benefits by not having to qualify for a traditional mortgage or comply with the cash down-payment requirements of various mortgage products. When structured properly the Installment Sale (a/k/a Contract for Deed) is a mutually beneficial arrangement. The buyer has a vested interest in maintaining the property and paying all obligations so that he gets title at the end of the financing term. The risks and costs of default are minimized for the seller/investor while ensuring solid cash flow and a good sale price. Of course, there are moving pieces to the deal that should be well understood by the parties. This vehicle should be a part of every real estate investor’s business.