The Contract For Deed should be used only when all parties fully understand the transaction and agree that it is best in a particular situation. The parties to the transaction must be comfortable with the ability of the buyers to perform and the credibility and trust worthiness of the seller. All parties should be fully advised about the risks of the transaction and should probably seek at least basic legal counsel, as Contracts For Deed do involve risks to both the buyer and the seller.
The Contract For Deed sale (also known as a Land Contract) is basically structured as an installment sale, where buyers may acquire possession of the property by taking advantage of the seller’s existing low interest rate financing. To achieve this, the parties sign a Contract For Deed which sets out all of the specifics of the financing. A deed from the seller to the buyer is executed and held in escrow. Thereafter, the buyer makes monthly payments to the seller, who then forwards the payments to the lender. Contracts For Deed constitute a sale for IRS purposes, thus allowing the buyer to obtain the tax benefits of a homeowner. A form 1099 is issued by the Settlement Company and time frames for capital gain rollover or exemption are triggered.
When the buyer is financially able to obtain a new loan or assume the existing loan with lender permission, the deed is recorded and the seller’s liability is extinguished. Should the buyer default on the payments, the Contract For Deed includes remedies for the seller including but not limited to forfeiture of any funds paid to date, execution of a quitclaim deed eliminating the buyer’s interest in the property or judicial foreclosure.
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