What is a Contract for Deed?
A contract for deed, also known as a real estate installment contract, contract for deed, or land installment contract, is essentially a seller-financed method of transferring ownership rights in a real property. Generally speaking, rather than securing a bank loan in order to pay a seller the full purchase price for a property, a buyer is allowed to move into and occupy a property and make periodic mortgage-style payments for their purchase over time. Often, these payments are made every month and are similar in amount to what they would have been had they secured a market-rate mortgage loan. Once the total purchase price amount is paid over time, the buyer receives a deed transferring ownership of the property to them. Until that purchase price is paid in full, however, the seller retains general ownership of property and some rights to reclaim it under certain circumstances while the buyer is allowed the right to freely occupy and use the property as if they were the fee owner, or the true owner of the property. True ownership in a property includes not only the bare legal title to the property but also the right to freely use the property as you want. This includes the right to rent the property to a third party with an independent lease. A contract for deed is somewhat of a compromise. The buyer is given the right to possess and use the property as their own through a lease, but the seller retains general ownership of the property until they are fully paid. Because the buyer has an interest in the property (though not an outright fee ownership) they are entitled to lease or license the property to any other third party they want, including the right to sublease it to another tenant. Before the buyer under a contract for deed is allowed to sublease to a third party, however, they would first need to obtain permission from the seller. Any attempt by the buyer to rent or lease the property without the permission of the seller would likely violate the terms of the agreement and provide the seller some rights to reclaim the property back from the buyer . The agreement is in the form of a written contract agreed to by the buyer and seller. It is important to note that although a buyer under a contract for deed may be able to enjoy some of the benefits of ownership under the contract, for the purpose of their rights and obligations under the law they are generally treated as a tenant of the property. This can have serious consequences for their ability to demonstrate to a court that they have an ownership interest in the property and those rights associated with it. The seller of the property, likewise, is treated as the owner of the property despite the fact that they have transferred rights to the property to the buyer. Since they are generally treated as a tenant of the property, a buyer under a contract for deed will have protections against a landlord who tries to unlawfully evict them from the property without due process of law. Indeed, regardless of their equitable interest in the property, the seller cannot simply have the buyer removed from it without first obtaining a legal judgment and writ from a court allowing them to do so. They do have the right, however, to evict the buyer from the property should they fail to make their payments under the contract and/or otherwise violate the terms of the agreement. Additionally, the buyer is entitled to all of the protections available to tenants throughout North Dakota, including the right to withhold rent, to receive notice before a foreclosure, and finally, the right to receive a property free and clear of any unpaid debts and other encumbrances. Once a buyer pays the full purchase amount of a property through a contract for deed, they no longer simply hold a possessory interest in the real estate but retain the same rights and interests of an outright fee holder and are entitled to receive a deed conveying them ownership in the property.
Advantages of Contract for Deed in North Dakota
In the landscape of North Dakota real estate sales, a Contract for Deed can be an advantageous option for both buyers and sellers. This unique financing method offers flexibility and negotiation opportunities absent with standard mortgage arrangements.
One of the most notable benefits of a Contract for Deed is the ability to negotiate various terms that are not commonly found in traditional mortgage contracts. For instance, buyers can negotiate to pay the Property taxes directly, rather than having them included in the monthly payment. This can prevent the buyer from becoming delinquent on taxes, and then suffering increased penalties, and avert an increased mortgage payment that may make it difficult for the mortgage to be paid. Negotiating this term could have an impact on the total cost of the house as well, because the cost of the tax payments would be subtracted from the monthly payment on the house. Additionally, North Dakota law allows for buyers and sellers to negotiate the interest rate on the debt. With a typical mortgage, the interest rates for lenders are controlled by state and federal law so there is little room for negotiation on an interest rate with a lender. Another interested aspect of a Contract for Deed is the ability of the buyer to offset the down payment with certain costs. This may include property taxes or insurance payments.
Another benefit is the reduced amount of closing costs involved in a Contract for Deed. Since a mortgage is not actually involved, there will be no recording fees, title searches, title insurance premiums, and there is no need for mortgage preparation fees. A further advantage is the shorter period of time needed to close. The seller is the one holding the deed until the buyer has paid 20 percent or more of the purchase price, and this is something that the seller is able to do relatively fast. This shorter period of time has a positive impact on the buyer. A quicker closing means that the buyer is able to move into the property faster. Often sellers prefer a quicker closing because they want to sell their home fast.
However, there is a downside to signing a Contract for Deed. While it may be easier to obtain than a mortgage, the interest rates are often higher and the buyer can lose his or her investment if the Contract is defaulted upon. Once the Contract is defaulted upon, the buyer has no home equity and the interest rate paid may be higher than with a mortgage, making it more difficult to refinance. If the seller-debtor defaults on a Contract for Deed, the buyer vendor can seek foreclosure proceedings. There is no right of redemption between the sale date and the foreclosure date. For a period of time, the buyer can mostly keep the property despite defaulting on the Contract, so long as the buyer maintains payments on a monthly basis. Less can be taken than could be taken in a foreclosure due to the way a foreclosure via a Contract for Deed works.
Risks and Drawbacks
We have established above that a contract for deed can be a great option for both a seller and buyer, but there are also many risks and pitfalls to consider:
Forfeiture Risks
The most common risk of a contract for deed arises from forfeiture. If the buyer, after making timely monthly payments, misses one or more monthly payments, the contract gives the seller the right to forfeit the contract and take the home back. This means that the buyer may work hard to pay the principal down, but at the end of the day, is subject to forfeiture of the entire down payment and all principal payments made if the seller so chooses.
Possible Title Issues
A contract for deed runs the risk of running into prior mortgages or liens that a seller had pre-existing before entering the contract with the buyer. A buyer should be cautious that their new home does not have prior mortgages or liens attached to it from the seller. If so, these issues should be resolved before the buyer takes possession of the property. At Vanguard Title, we can run a title search on the property and resolve any issues that might pose a concern.
Lack of Buyer Protections
A buyer under a contract for deed has little to no protections against the seller’s actions. The buyer will not be eligible for any loss mitigation programs, such as foreclosure prevention and mediation programs. Without the protections offered by some North Dakota foreclosure statutes, all the buyer’s time and money invested in the property is out the door if the seller forecloses. In addition, the buyer has no recourse for improvements they make to the property during the contract or any other expenses they took on.
Legal Requirements in North Dakota
In North Dakota, a contract for deed must be in writing and signed by the party to be charged. N.D.C.C. § 9-06-04(1). The writing is required to state the names of the parties, a description of the property and the price, terms, and total payments to be made by the buyer. Id. The real property must also be sufficiently described in the contract so that a competent surveyor can ascertain its boundaries.
The statute of frauds, N.D.C.C. § 9-06-04, will apply to contracts for deed, as it does to most contracts involving land. The statute of frauds generally means that the party against whom a contract is being enforced must have signed a writing evidencing the contract’s material terms. North Dakota courts will try to construe ambiguities in the contract for deed in favor of the buyer.
The contract for deed must include the appropriate language required under N.D.C.C. § 30.1-08-03(b) which states that "the purchaser understands the risks involved with a contract for deed."
Common Provisions in a Contract for Deed
A contract for deed is also known as a land contract, an installment land contract or a contract of deed. The basic idea in each of these contracts is that the buyer agrees to pay for an interest in real property over time and, in return, the seller agrees to let the buyer occupy the property. After the last payment, the seller will deliver the title to the buyer.
Payment schedules. Payments are usually made to the seller on a monthly basis. Monthly payments are typically fixed at the time the contract is signed and usually include principal and interest. The seller must provide the buyer with a written receipt after each payment.
Interest rate. Interest can be fixed or variable, depending on the terms of the contract. Interest rates have no restriction under North Dakota law and are negotiable between buyer and seller.
Late fees. A contract may include language specifying a penalty if the monthly payment is not paid by a specific date. These late payment penalties usually run from $5 to $25 and generally involve a percentage of the monthly payment (not to exceed 5 percent). However , if the buyer uses an attorney or real estate agent, there is no requirement that the buyer be liable for attorney’s fees or costs unless the contract specifically includes a clause allowing the awarded recovery to be added to the debt owed under the contract. And, although it is common, there is no requirement that the contract require the prevailing party to be awarded its attorney’s fees or costs.
Default provisions. A contract for deed is a form of deed of trust and mortgage. The seller’s obligation to transfer the interest in the property is contingent upon the buyer’s timely payments and compliance with other terms of the contract. When a buyer defaults, the seller can exercise various remedies, including the power of sale (which allows foreclosure under the contract in a similar way to a mortgage).
Title. Under North Dakota law, the title does not actually pass to the buyer until all payments and terms have been satisfied. Under a typical contract, the seller retains a first lien on the property until all payments have been satisfied.
How to Effectuate a Contract for Deed
Steps to Execute a Contract for Deed:
Negotiation and Offer:
Just like any other contract, the contract for deed in North Dakota starts with an offer or offer letter. In some cases, the offer might be made by the seller itself for a property to a buyer, or they can be relied on real estate company listings or the internet. Once the potential buyer takes interest in the offer or what the seller has offered, a negotiation process begins between the two parties. In North Dakota, due diligence is essential prior to executing a purchase agreement. You should therefore perform background research and inspections on all state laws, costs, liabilities and taxes inclusive of but not limited to the real estate.
Signatures:
Once a price is agreed upon, we advise you execute a Contract for Deed. It can either be signed by the seller by the seller as an entity (company or corporation) or by one of its stipulated parties (substitute signatories). If it is to be signed by a business entity, they must clearly specify its terms so as prevent fraud, and concealing the assignee from making any misappropriations.
Recording:
Generally speaking, the contract for deed is then recorded in the country in which the property was purchased and resides. And only once the contract has been recorded is the purchaser actually responsible for the property (and liable for future payments); however, "legally", the seller is still the owner of the property until the contract term expires.
Contract for deed alternatives
The average buyer may not understand the concept of contract for deed, but there are other options available for you to purchase a home. A traditional mortgage is the cornerstone for home buying. The advantage here is that as long as you make your payments on time, you will build equity in your new home. When you eventually decide to sell, you’ll reap the benefits of your investment. However, you must have good credit, and if your credit score is under 400, some lenders will just consider you a liability and you will have no chance of obtaining a loan. Regardless of your credit, you are still responsible for the mortgage until the last payment.
A lease-to-own agreement allows you to rent the home for an agreed-upon period. At the end of the lease, the right to purchase can be transferred to you. One serious drawback to this arrangement is that you’ll have to pay a large up-front option fee that can reach thousands of dollars. At the end of the lease, you will only receive a partial credit towards the purchase price. If you still do not have the proper funds to purchase the home, you’ll have to move, and you lose out on the money you invested.
Seller financing could also be an option. This is a document between the buyer and seller that details the sale terms and states that the seller will finance all or part of the purchase for the buyer. As a result, the seller will collect monthly payments from the buyer instead of a bank or mortgage lender. The seller becomes the mortgage company. Most sellers will require a large down payment, generally 20%.
Key Considerations for Buyers and Sellers
Both buyers and sellers of real property in North Dakota have a lot to think about prior to entering into a contract for deed. While favorable conditions may tempt a buyer or seller to proceed with a purchase and sale agreement , it is important to first consider your own financial stability and if you want to be husband-and-wife landowners for the duration of the contract for deed period. A contract for deed places the properties purchaser (the buyer) under the same obligations as if he or she had purchased the home outright. Many people will also hesitate to make any structural or aesthetic improvements to a property if it is not under their name. The bottom line is that entering into a contract for deed is usually a long-term commitment for a buyer and seller. Also, if the parties do not fulfill their respective duties under the contract, the contract could lead to a dispute, or worse, a judicial foreclosure.