The Disadvantages of a Contract for Deed

A contract for deed is a real estate transaction where the seller keeps the deed for the property until the buyer completes a series of installment payments. It is often used in situations where typical financing methods are not available. Depending on the language of the contract and the performance of the buyer and seller, there are a number of disadvantages for either party.

A contract for deed is used by some sellers who finance the sale of their homes. For some buyers who don't qualify for a conventional mortgage loan with a traditional lender, such as a bank or savings and loan, seller financing may be their only option to purchase a home.

Because the seller retains ownership of the property until the transaction is completed and the contract is fulfilled, he still remains liable for any mortgage or debt. Thus, if he attempts to secure a loan or obtain financing, he is viewed as still having the debt associated with the property, which can make it more difficult to obtain financing for other purposes.

If the buyer defaults on the agreement, it can have negative implications for the seller. The seller runs the risk that the buyer could go bankrupt, become disabled or simply stop paying the seller. If the seller takes the buyer to court, it is always possible that circumstances could dictate that the court may interpret the contract in a way that favors the buyer.

The buyer could be at risk for lack of performance by the seller. The buyer may still be on the hook even if events occur that result in the seller not being able to deliver the deed. For example, if the seller dies during the contract period and did not properly organize his affairs, the property could end up in probate, meaning the buyer may not obtain the deed even though payments had been made.

It is possible that liens could be made against the property during the life of the contract, which can jeopardize the buyer's acquisition of the property. For example, if the seller incurs tax debt, the IRS could place a lien on the property which may make it problematic for the buyer to obtain a clear title.

There is a possibility that entering into a contract for deed could trigger the seller's due-on-sale clause, also called an acceleration clause, in his original mortgage contract. This means that the mortgage lender could demand that the seller accelerate the payment of the original mortgage, and the seller would have to immediately pay the remaining balance.