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What are risks and tips on selling a home with a contract for deed?

I currently have my house leased to a renter who wants to buy the house, but is doubtful he is able to obtain his own financing.
  • January 02 2013 - East Peoria
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Answers (8)

Besides if a buyer is giving you $100,000 + $3,000 in attorneys fees isn't even a factor. Also seller financing can be done in such a way that doing a foreclosure isn't necessary should the buyer default.
  • January 02 2013
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Please don't take what I said out of content. You know what I meant.

  • January 02 2013
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Seriously Phil? No a seller should not want a buyer to default. Ethically I would never work with a seller who wishes harm to a borrower (and neither should you), and also it won't make financial sense. The attorneys fees to evict or foreclose can run upwards to 3k, you will have loss of income on the time it takes to evict, and there is no telling what the borrower would do to the property if they left. 

Seller Financing is all about creating win-win situations. THAT is when these contracts are successful. The horror stories come from malicious sellers and borrowers who don't plan accordingly out of ignorance.  
  • January 02 2013
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Regarding 'seller financing' or 'owner carry', this is a great way to buy or sell real estate. In many cases it is more beneficial for the seller than the buyer!!! Where else can a person get 5%, 6% or more on their money today? This is GREAT for a seller if they don't need to cash out!

The #1 question sellers always ask is, 'what if they default?' You should hope they default. If they do you keep the down payment and get the property back, how would you like to do that 2 or 3 times a year?

The fact is that in my 19 years of helping buyers and seller with seller financing I have not had one person default. There are several reasons for this. One is that there is normally not enough time to default as the 'term' in most cases is 3-5 years. The second is that the buyer puts up a nice size down payment and he doesn't what to lose that. Besides the seller needs to 'check out' the buyer before entering escrow.

Anyway the banking system is broke and it's not getting better. The banks are currently painting themselves in a corner, we'll see a lot of stuff 'hitting the fan' shortly.

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  • January 02 2013
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To be sure you do things correctly when there is a contract for deed, I suggest that you consult a local attorney who handles residential real estate matter.
  • January 02 2013
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A contract for deed at the most basic sense, or in your case it may be a rent-to-own, is a seller financing product. These are used when a buyer is unable to currently qualify for traditional financing due to credit. 

Recent foreclosures and Bankruptices I see a lot with the people I work with (I do both types of transactions). It is 3 years to repurchase for a foreclosure and 2 years for a bankruptcy on FHA, so seller financing can be a great product short term until they can obtain traditional financing.

It must be stated that seller financing is almost always not a long-term solution for borrowers. These products are best suited for those who experienced a hardship, and therefore need time to build up their credit. In other words, is their credit situation fundamentally due to bad behavior patterns, or did they have a hardship? These are things to consider when determining risk for a borrower. It is still income based and uses a down payment as well. 

It is pure ignorance to state a buyer is not qualified because a traditional lender tells them no. I have worked with borrowers who have 20% down-payment and DTI's in the 20% range who simply had a short-term hardship that dinged their credit. How are they less qualified than a borderline FHA borrower who can only do 3.5% and needs seller paids in order to even close? I have always believed it is not my place as a realtor to judge people based off my personal beliefs. In my profession that is dangerous and probably others too. 

Ultimately it comes down to you who acts like the bank. It is your money, and in seller financing you must decide if a buyer is risky or not. The process to foreclose in contract for deeds, or evict on a lease option, are very expensive. It does neither party any good to get into a bad deal. 

This is a very brief overview, but I can tell you that if the borrower has a down payment that you find sufficient (in my market 5-10% rent-to-own and 10-20% contract for deed), and they have income (you can use 30% gross as a starting point) it is certainly something to consider.

Also speaking with a loan officer would be helpful, because ultimately you need to figure out the timeline for them to obtain traditional financing. There is so much on this topic that you really need to educate yourself. Besides default as the biggest risk I put ignorance as 2nd. 

Lastly, and added layer is that this person is already a tenant of yours. How has it worked so far? Have they been great tenants or not? You already have a relationship which I would think is a big piece of the puzzle.

Good luck to you!

~Chris
  • January 02 2013
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This deals seldom work for the buyer, and they are frustrating for the seller as well.  The bottom line is, when a buyer cannot be pre-approved by a lender, he is not ready to buy. PERIOD  Patience is the biggest asset a person can have, the buyer must wait until he is ready.  Meanwhile, he can start saving for the downpayment, which in this case will be much larger than a conventional or FHA. 
  • January 02 2013
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The risks are obvious..............the tenat cannot get a loan. Just tell him to wait until he can get a loan and then deal with a contract. Prices have started to go up so in 1-2 years when he is ready, prices should be higher. The tenant wants to lock you in to a price now.Rent to own is a horrible way to sell. It is full of potential problems.
  • January 02 2013
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