I need some advice on whether or not it is a good idea to go into a contract for deed in california.

Asked by Jessica, Bakersfield, CA Tue Jun 17, 2008

I am currently looking into a contract for deed home and was wondering if this was a good deal. This company is offering a new home at 1% down and $1550/mo for 3yrs, then at the end of 3yrs I would refinance and purchase through a bank. It includes property taxes and homeowners insurance. Is this common and how does it actually work?

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Don Tepper, Agent, Burke, VA
Tue Jun 17, 2008
It works like a layaway plan at a department store (if they do that any more). Another party holds the deed to the property. You may your payments to the owner the agreement calls for the deed to be transferred to you in (your case) three years.

Like lease-options, lease purchases, and land contracts, you do run some risks. The primary one is that, at the end of the period, the owner doesn't transfer (or is unable to transfer) the lease to you. If, for instance, the owner fails to make payments and is foreclosed upon, you'll end up with nothing. Another concern, in today's market, is that the property might not appraise for what you'll be paying for it. Let's say you've agreed to pay $300,000 for the property in 3 years. Suppose in 3 years you apply for a loan and the appraisal comes back at $275,000. That could be a problem.

There are ways to protect yourself in both those scenarios. In the first case, you can escrow the documents. And have the owner provide you a document ("Authority to Release Information") that will enable you to monitor the status of his mortgage. Or, better, use a land trust with the trustee as owner of the property.

In the case of it not appraising for the agreed-upon price, make sure you have provisions addressing that in your contract. Possibly something allowing an extension of the contract for another year or two years if the property fails to appraise.

Make sure you have a real estate lawyer review all the documents before you sign anything.

Hope that helps.
1 vote
Robert Savage, Agent, Bakersfield, CA
Fri Aug 6, 2010
I would certainly advise you to have an attorney review all the documents. If it is structured properly a contract for deed can be a good option for both parties. 1% down is not an unreasonable amount.
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