In Washington State, a "contract for deed" is often known as a real estate contract. These deals, where the seller holds the title as collateral for the purchaser and the purchaser makes contract payments directly to the seller, can provide an easy way for the buyer to purchase a home without having to run the bank approval gauntlet.
In the state of Washington, a contract for deed allows buyers who don't qualify for traditional lending a way to purchase property by making regular payments to the seller until the full price is paid.
Exploring the Forfeiture Option
In Washington, the seller has the right to opt for forfeiture instead of the more costly and time-consuming foreclosure option. A seller may begin forfeiture proceedings if the purchaser is unable to meet one or more of the promises that he agreed to in the real estate contract. In forfeiture, if the purchaser cannot "cure the default" – meaning, come current on all outstanding balances – the seller simply reclaims the property and keeps the payments made as liquidated damages. If the purchaser cures the default, the contract is reinstated and he may resume making payments.
Evaluating Foreclosure Opportunities
Foreclosure is a difficult process but may be a Washington seller's only option if the purchaser cannot cure the default before the prescribed period ends. In foreclosure, the seller accelerates the total balance due, and if the purchaser cannot pay, he is evicted from the property (if he doesn't leave on his own). If the seller opts to foreclose on the contract as a mortgage, he must record a notice that cancels the forfeiture action, if necessary. At foreclosure, Washington permits any person to purchase the property, and the highest bidder wins.
Sale of Property in Lieu of Forfeiture
A seller may also attempt to have a court-ordered sale of property in lieu of forfeiture. If the fair market value of the property is greater than the amount that the seller is owed, the seller is only entitled to the balance due him on the contract, in addition to fees. The new purchaser of the property must immediately give a deposit to the court for the property's purchase; after the sale, he has seven days to come up with the rest of the money.
Understanding Equitable Title
In Washington, real estate contract purchasers hold equitable title to the property, as opposed to equity. This means that the purchaser has a financial stake in the home equal to the amount of money that he's paid into it. Because the deed hasn't been transferred to his name, he may find it impossible to secure secondary financing, such as a home equity loan. However, he is able to deduct the portion of his monthly payments that constitute interest, as well as property taxes. He's also responsible for repairs and maintenance.
Lisa Bigelow is an independent writer with prior professional experience in the finance and fitness industries. She also writes a well-regarded political commentary column published in Fairfield, New Haven and Westchester counties in the New York City metro area.