Understanding the Disadvantages of a Contract for Deed!
A contract for deed for a home loan turns out to be beneficial for both the parties i.e. buyers and sellers if it is prepared under smooth and proper conditions.
If the circumstances don’t turn out to be good and are not made very well, then it could bring many difficulties for both the parties in the future. So, before really going for it, both the buyer and seller need to evaluate and see all the limitations and possibilities needed for the contract for deed before finalizing the arrangements which are usually done in coordination with many attorneys.
What is a Contract for Deed?
Let me explain it in easy words, an agreement made between a buyer and a seller for a real estate property giving power to the seller for the title of the property until the contract’s provisions have been filed which is actually when the payment has been done. During that time, the buyer can get hold of the property and provide the payment. When the payment is completed, the seller transfers the title to the seller recording the deed.
Coming to the topic, here are the disadvantages of a contract for deed for both buyers and sellers.
Risks for Buyers and Sellers
The buyers remain at risk of losing the property if he fails to provide the monthly payment and there is no justice for it until all the payment is done. One of the disadvantages of a contract for deed for a seller is that if a buyer defaults on the contract, the seller comes in difficulty as clearing the title require time and money. For buyer default action, the seller is authorized to foreclose the property and the buyer wouldn’t do anything against it.
Seller’s Responsibility
As the seller owns the title of the property until the payment is done, he still is responsible for any type of debt and mortgage. Even if the seller tries to get a loan or finance, his debt still remains with him as with the property, and this will trouble him for finances for other purposes.
Property Liens
Another disadvantage of a contract for deed is sometimes liens are made against the property during that time which can create hurdles for the buyer to get a hold on the property. Let’s say, the seller encounters with a tax debt, the IRS put a lien on the property so, gaining title for the buyer turns out to be really difficult.
Due-on-Sale Clause
It is one of the risky disadvantages of a contract for deed that it sometimes brings the seller’s due-on-sale mortgage contract. This includes the power of the mortgage lender that he might ask for the immediate payment of the remaining balance of the original mortgage or to lessen the payment duration. In both cases, the buyer finds it difficult to stay on the contract, as to gain the title may become risky.
Other Issues
As to sum up the other disadvantages of a contract for deed, here come the final words. It is possible that during the contract period, the seller comes under the bankruptcy case, dies, or lost somewhere which in turn needs the validation of the property and risk the buyer’s contract. In that circumstance, the buyer’s only option is to be patient and give time to pass through expensive lawsuit trials to prove himself of the claim about the ownership of the property. Even after the final payment has been made, the seller could withhold the property transfer to the buyer. The seller could even fail to provide the lender the actual payments after the buyer’s done with that, or maybe, sometimes, the buyer fails to see his interests as something is restricting him from doing so in the contract, as per the California Department of Real Estate.