Buying a House on Contract.

Updated on March 03, 2011
A.K. asks from Stinesville, IN
4 answers

A couple of my friends have done this, I don't know anything about it. What is the benefit to doing It & how does it work? Is it a form of renting & easier to get out of? I don't understand. We own our home now but are looking to move shortly & I'm curious.

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answers from Dallas on

You are referring to "contract for deed", I believe. I know oh so much about it, and can tell you some facts. You can derive for yourself if you feel any of these are pros or cons.

First, let's get the basics out of the way... Seller needs to sell and buyer wants to buy, but for some reason, there are prohibitive obstacles with the current market (whether seller's situation or buyer's mortgage qualifying). Usually a 3rd party can connect buyer and seller, for which, charges a fee (that is usually paid out of buyer's down payment).

- Buyer and Seller agree on a price (this is often derived from monthly mortgage payment amount rather than actual fair market value). Seller makes a credit decision about Buyer. Note: Buyers are not always those who have bad credit. Many self-employed people these days have excellent credit, but write everything off and don't claim income on their personal taxes. This prohibits them from qualifying for a bank loan. They certainly have the cash flow, but can't prove the income personally.

- Property is transferred into a Land Trust where Seller retains 90% Benefit Interest.

- Buyer pays a down payment of usually 10% of sale price. Part of it will go to Seller, part will go to 3rd party as a "commission" for the sale. Part of it will be held in escrow in case Buyer stops paying. In many areas, the 3rd party is NOT a Realtor. Buyer will retain 10% Benefit interest in Land Trust.

- Deed is conveyed from Seller to Buyer. Promissory Note stays in the Seller's name.

- Buyer pays monthly payments in excess of Seller's existing mortgage payment so there is positive cash flow, building the Buyer equity,and Seller incentive for the transaction.

- Both parties can write off mortgage interest on taxes because Benefit Interests are there. Buyer can write off Real Estate Property taxes.

- Seller gets to sell and Buyer gets to buy.

- If Buyer can qualify for a bank loan at some point in the future, the transaction is treated as a purchase and the Seller's loan is paid off with the Buyer's new loan.

- A Note Modification can be executed within the transaction to lower the Seller's payment, making the monthly payment more affordable and benefiting both parties.

- If the Buyer defaults, the 3rd party who structured the transaction uses funds in escrow to cure deficiency. Buyer forfeits Beneficial Interest and down payment to Seller.

Hopefully this answers your questions. There are many other "wrap" Note/Owner financing models that people can dream up, but this one is the only one that truly protects all parties.


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answers from Tulsa on

Do not just pay rent and think this will do it. A poor woman is paying rent and thinks when the owner dies, the house is hers. The truth is she has signed a rental agreement that doesn't even say land contract or sale anywwhere. She is being duped and won't listen to reason.

You must have a written, signed contract spelling out the terms of the contract to protect you. Renting with the option to buy usually is reserved for people who can not get a traditional mortgage due to bad credit. It has a higher interest rate(unless you buy from a rich relative) and your payments are reported to the credit agencies just like other loans if you don't pay. If you are paying, you might have to ask the person to report it so you have positives on your credit report. I would not sign anything without a lawyer that you hire checking it out first. Plus, you will still be responsible for repairs and maintenance in every case I have seen. Your contract should include a clause for you to not buy it, but if you do X dollars of each month's rent is applied toward the purchase price of y dollars. That way you don't fix up a house, then have them say "The house is worth more now."



answers from Springfield on

I'd like to help you but am not sure what you mean exactly. Where I live, every house purchase is done via a contract. Both the seller and the buyer sign a contract that is multiple pages that protect each party in the event of a problem. When a home is "under contract" it means both parties have agreed on a price and are waiting for all the inspections and other items to take place and be resolved. After about 30 days, if everything goes well--financing passes, all items have been fixed, replaced, etc--then the home is officially sold and the contract fulfilled.

Some homes are being leased nowadays... as well as rented with the option to buy. That might be what you're referring to. That's sort of new territory with this downturn housing market we've experienced in the last 4 years. I would consult with a realtor who can help you understand how this process works and help you find the right fit for you, if that applies.

There are also homes for purchase in a "short sale"... where you can sometimes get a good deal. But it requires alot of patience and time and there is no guarantee in the end that you'll end up with the house for the price you bid. Sometimes it does though... that's how I bought my home and couldn't be happier. The best person to answer your question is a realtor. Best of luck!



answers from Phoenix on

Contact my husband he can asnwer any questions your have. He has been in the industry for over 15 years. He loves helping people makes him feel productive lol ###-###-#### Mike

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