Selling a house contract-for-deed
November 30, 2023 12:25 PM Subscribe
I'm trying to sell my house, and I have a buyer who is interested in purchasing contract-for-deed. Is that fine?
This is a multi-family house which makes it moderately less weird that the buyer doesn't want a conventional mortgage -- they're likely an investor rather than a family looking to house themselves. Nevertheless, I'm automatically wary of any less-than-ordinary real estate transaction.
The basics of a contract-for-deed arrangement suit me fine: getting the money over several years is OK with me, and I'm happy to get bonus interest out of the deal. My accountant says that it'll be basically fine, tax-wise. And all the research I do implies that c-for-d is mostly risky for the buyer and not for the seller.
So... I have three big questions:
1) What are some non-obvious reasons why a buyer might prefer seller-finance rather than a bank loan? (The obvious reason would be: they have bad credit.)
2) I know that the contract will stipulate that the buyer not run the house into the ground while it's still in my name, but is there any way I can actually enforce that?
3) Can someone with experience in this realm either reassure me that this is totally normal, or warn me off?
This is a multi-family house which makes it moderately less weird that the buyer doesn't want a conventional mortgage -- they're likely an investor rather than a family looking to house themselves. Nevertheless, I'm automatically wary of any less-than-ordinary real estate transaction.
The basics of a contract-for-deed arrangement suit me fine: getting the money over several years is OK with me, and I'm happy to get bonus interest out of the deal. My accountant says that it'll be basically fine, tax-wise. And all the research I do implies that c-for-d is mostly risky for the buyer and not for the seller.
So... I have three big questions:
1) What are some non-obvious reasons why a buyer might prefer seller-finance rather than a bank loan? (The obvious reason would be: they have bad credit.)
2) I know that the contract will stipulate that the buyer not run the house into the ground while it's still in my name, but is there any way I can actually enforce that?
3) Can someone with experience in this realm either reassure me that this is totally normal, or warn me off?
Just be aware that these types of contracts can be transferable and one or both parties may change over time. That can be good or bad for you, depending.
posted by bug138 at 12:41 PM on November 30, 2023 [2 favorites]
posted by bug138 at 12:41 PM on November 30, 2023 [2 favorites]
A few things to think about:
- make sure the buyer provides you with proof of insurance and property tax payments on a timely basis so you have time to remedy the situation if they fail to pay
- provide for a regular inspection and requirement to bring the property back to reasonable condition (something that will need to be defined) Have a procedure for what happens if they fail to so in a timely manner (allowing for how hard it can be to get repair people lined up)
- what happens to the renters in the house? you might want to be able to require written rental agreements with terms that need to be meet your approval so you don't end up repossessing the property and having tenants that are hard to get rid of.
- you will want to run a credit check or otherwise get the kind of information that a bank would require for a mortgage to give you some confidence that they can actually pay you. I know you have the ability to reclaim the house if they fail to pay so the risk is lower but you don't want to do this deal unless it has a pretty chance of success.
posted by metahawk at 1:18 PM on November 30, 2023 [1 favorite]
- make sure the buyer provides you with proof of insurance and property tax payments on a timely basis so you have time to remedy the situation if they fail to pay
- provide for a regular inspection and requirement to bring the property back to reasonable condition (something that will need to be defined) Have a procedure for what happens if they fail to so in a timely manner (allowing for how hard it can be to get repair people lined up)
- what happens to the renters in the house? you might want to be able to require written rental agreements with terms that need to be meet your approval so you don't end up repossessing the property and having tenants that are hard to get rid of.
- you will want to run a credit check or otherwise get the kind of information that a bank would require for a mortgage to give you some confidence that they can actually pay you. I know you have the ability to reclaim the house if they fail to pay so the risk is lower but you don't want to do this deal unless it has a pretty chance of success.
posted by metahawk at 1:18 PM on November 30, 2023 [1 favorite]
This the other direction but I bought a house once this way and the seller requested it because they wanted to hide the cash flow from their spouse. (IDK how that actually worked).
If the transaction is structured in such a way that it doesn't have to be publicly registered until completion the buyer may be doing it to hide the transaction from the public. EG maybe they are trying to buy several adjacent properties and don't want that to show.
posted by Mitheral at 1:20 PM on November 30, 2023
If the transaction is structured in such a way that it doesn't have to be publicly registered until completion the buyer may be doing it to hide the transaction from the public. EG maybe they are trying to buy several adjacent properties and don't want that to show.
posted by Mitheral at 1:20 PM on November 30, 2023
I sold a house this way but it was a few decades ago. It worked out fine. The buyer was a doctor buying investment properties, payments were made reliably, and they paid off the contract early when they refinanced at some point.
It felt risky to still have any kind of stake in the house when I really just wanted it gone, but it had some drawbacks that meant people looking for investment properties were the only interest we got when we put it on the market, and in the end it was very little trouble. I kept very careful records about payments and any phone calls I had with the buyer's management agent.
posted by Well I never at 2:16 PM on November 30, 2023 [1 favorite]
It felt risky to still have any kind of stake in the house when I really just wanted it gone, but it had some drawbacks that meant people looking for investment properties were the only interest we got when we put it on the market, and in the end it was very little trouble. I kept very careful records about payments and any phone calls I had with the buyer's management agent.
posted by Well I never at 2:16 PM on November 30, 2023 [1 favorite]
make sure the buyer provides you with proof of insurance and property tax payments on a timely basis so you have time to remedy the situation if they fail to pay
Yes, you're basically taking on the burdens of a mortgage servicer here in many respects. A tax lien is senior to almost anything else, including the loan (or a mortgage)--if the taxes aren't paid and the house is seized, it will be quite the headache for you. Ditto if hazard insurance isn't maintained and some hazard materializes. There are services which will monitor such things, but I don't know whether it's economical for individuals to use them.
Consider also whether you are actually willing to go through whatever process is required in your state to seize possession of the property upon non-payment. It will cost time and money, especially if there are tenants in place. Are you comfortable forcing someone to forfeit what might be years of "equity" in the property? What will you do if the buyer falls into distress and comes to you requesting some form of modification?
In the real world, contract for deed between individuals mostly exists for (a) related parties and similar weird situations and (b) cold-blooded, sharp-elbowed companies that expect the borrowers to default. I don't know that it's an automatic "no" for an ordinary buyer and seller, but you really need to think through details like the ones mentioned above first, and probably consult an attorney.
posted by praemunire at 2:20 PM on November 30, 2023 [4 favorites]
Yes, you're basically taking on the burdens of a mortgage servicer here in many respects. A tax lien is senior to almost anything else, including the loan (or a mortgage)--if the taxes aren't paid and the house is seized, it will be quite the headache for you. Ditto if hazard insurance isn't maintained and some hazard materializes. There are services which will monitor such things, but I don't know whether it's economical for individuals to use them.
Consider also whether you are actually willing to go through whatever process is required in your state to seize possession of the property upon non-payment. It will cost time and money, especially if there are tenants in place. Are you comfortable forcing someone to forfeit what might be years of "equity" in the property? What will you do if the buyer falls into distress and comes to you requesting some form of modification?
In the real world, contract for deed between individuals mostly exists for (a) related parties and similar weird situations and (b) cold-blooded, sharp-elbowed companies that expect the borrowers to default. I don't know that it's an automatic "no" for an ordinary buyer and seller, but you really need to think through details like the ones mentioned above first, and probably consult an attorney.
posted by praemunire at 2:20 PM on November 30, 2023 [4 favorites]
I have seen things go well, but also very, very wrong with contract-for-deed; I join in praemunire's advice to contact an attorney.
People using contract-for-deed, or some sort of variant on this, are often people who cannot afford the normal services that are utilized, such as mortgage services. Often, this is because of bad credit; sometimes this is because of less-than-legal income, or irregular income. The other place you see this a lot is people who come from a rural culture of distrusting banks.
One of the problems that you see with contract-to-deed is that because these things aren't usual, the contracts used are often based off older templates, that haven't been updated to deal with modern developments in law, and so will often fail to address legal issues that will wind up being important later. In addition, because they aren't handled as often, attorneys aren't as used to them and will either take significantly more time to come up to speed on them (and thus charge more), or will wind up missing things that put you in a worse position. There's an Ask I have about lawyers from a time when I dealt with an inherited mess of a contract-to-deed problem. Two sets of lawyers just looked at the wording of the contract, which was favorable to the seller, and didn't connect it to things like homestead laws in the state, or how the contract might interact with a filing for bankruptcy. As a result, only a small portion of the amount that should have been paid under the contract wound up being recoverable.
posted by corb at 2:45 PM on November 30, 2023 [6 favorites]
People using contract-for-deed, or some sort of variant on this, are often people who cannot afford the normal services that are utilized, such as mortgage services. Often, this is because of bad credit; sometimes this is because of less-than-legal income, or irregular income. The other place you see this a lot is people who come from a rural culture of distrusting banks.
One of the problems that you see with contract-to-deed is that because these things aren't usual, the contracts used are often based off older templates, that haven't been updated to deal with modern developments in law, and so will often fail to address legal issues that will wind up being important later. In addition, because they aren't handled as often, attorneys aren't as used to them and will either take significantly more time to come up to speed on them (and thus charge more), or will wind up missing things that put you in a worse position. There's an Ask I have about lawyers from a time when I dealt with an inherited mess of a contract-to-deed problem. Two sets of lawyers just looked at the wording of the contract, which was favorable to the seller, and didn't connect it to things like homestead laws in the state, or how the contract might interact with a filing for bankruptcy. As a result, only a small portion of the amount that should have been paid under the contract wound up being recoverable.
posted by corb at 2:45 PM on November 30, 2023 [6 favorites]
Corb mentions it in their excellent answer above, but I'd think the potential bankruptcy of the buyer would be an important thing to consider here (as well as if the contract could, theoretically, be dismissed in said bankruptcy).
posted by yellowcandy at 7:20 PM on November 30, 2023
posted by yellowcandy at 7:20 PM on November 30, 2023
Best answer: 1. Multifamily is considered commercial real estate and banks are quite skittish about financing that right now because of losses in other part of the sector. Even if the buyer has good credit, a loan could be hard or cost prohibitive, particularly if they don’t have a track record.
2. Make sure you either carry the policy directly or are an additional insured on the policy. A copy of the policy is not enough because they could cancel and you wouldn’t know. As an additional insured the insurance company should let you know before any policy interruption.
Outside of an eviction, risk of intentional damage should be low. Buyer stands to lose more if you find a breach of contract that lets you keep the house and payments. If you are forced to evict them, they may choose to damage the place in retaliation. You can sue, but not much you can really do to stop that. Insurance coverage may help.
3. This is normal particularly for multifamily. It is a much riskier proposition for the buyer than the seller as long as you retain title until the property is fully paid off. The key is an experienced attorney who drafts a contract that protects you.
Make sure you retain title until fully paid, are named on the hazard insurance policy, and get a lawyer to draft the sale contract. I would strongly suggest getting additional liability insurance as well.
posted by limagringo at 6:15 AM on December 1, 2023 [2 favorites]
2. Make sure you either carry the policy directly or are an additional insured on the policy. A copy of the policy is not enough because they could cancel and you wouldn’t know. As an additional insured the insurance company should let you know before any policy interruption.
Outside of an eviction, risk of intentional damage should be low. Buyer stands to lose more if you find a breach of contract that lets you keep the house and payments. If you are forced to evict them, they may choose to damage the place in retaliation. You can sue, but not much you can really do to stop that. Insurance coverage may help.
3. This is normal particularly for multifamily. It is a much riskier proposition for the buyer than the seller as long as you retain title until the property is fully paid off. The key is an experienced attorney who drafts a contract that protects you.
Make sure you retain title until fully paid, are named on the hazard insurance policy, and get a lawyer to draft the sale contract. I would strongly suggest getting additional liability insurance as well.
posted by limagringo at 6:15 AM on December 1, 2023 [2 favorites]
1) What are some non-obvious reasons why a buyer might prefer seller-finance rather than a bank loan?
I'm not familiar with the real-estate case, but I've seen this more in the sale of small businesses, so one reason, if they're an investor, is that they're already over-leveraged on other properties. In this case, they're essentially using the house they're buying as collateral in the loan. In the small business cases I've seen (one a doggy daycare, one a design agency), the investors were trying to roll multiple businesses into a larger entity and could no longer use bank or investor financing because of other purchases. In both cases, the sales eventually fell through, and the assets returned to the sellers - who got whatever they were paid to that point and then re-sold the business. This wasn't ideal because of the hassle but they did actually get more money out of the transactions at the end.
posted by bitdamaged at 8:38 AM on December 1, 2023
I'm not familiar with the real-estate case, but I've seen this more in the sale of small businesses, so one reason, if they're an investor, is that they're already over-leveraged on other properties. In this case, they're essentially using the house they're buying as collateral in the loan. In the small business cases I've seen (one a doggy daycare, one a design agency), the investors were trying to roll multiple businesses into a larger entity and could no longer use bank or investor financing because of other purchases. In both cases, the sales eventually fell through, and the assets returned to the sellers - who got whatever they were paid to that point and then re-sold the business. This wasn't ideal because of the hassle but they did actually get more money out of the transactions at the end.
posted by bitdamaged at 8:38 AM on December 1, 2023
Response by poster: Summary in case anyone is in suspense:
- I discovered that I can keep paying of my existing 3% mortgage during the contract-for-deed period, which makes selling this way compelling.
- I was mostly reassured by comments here and resolved to go ahead with the deal after having a lawyer review the contract.
- The buyer never actually made an offer so all this is moot for the time being. *shrug*
posted by eraserbones at 7:48 AM on December 5, 2023 [1 favorite]
- I discovered that I can keep paying of my existing 3% mortgage during the contract-for-deed period, which makes selling this way compelling.
- I was mostly reassured by comments here and resolved to go ahead with the deal after having a lawyer review the contract.
- The buyer never actually made an offer so all this is moot for the time being. *shrug*
posted by eraserbones at 7:48 AM on December 5, 2023 [1 favorite]
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