Home Buying in Foreston>Question Details

Dawn, Home Buyer in Foreston, MN

what are things to worry about when doing a contract for deed?

Asked by Dawn, Foreston, MN Thu Jul 1, 2010

If we do a 5 year deed and he says he will renew it after that as long as payments are on time, is there anything else we need to worry about, he has to renew the deed if we have proof that the payment was on time. is there anything to worry about?

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Pretty good advice below.

I'm glad James raised the point that you want to make sure the owner keeps making the payments on the property. That's very important because, even with an otherwise airtight contract for deed, you'd lose everything if the owner defaulted on his mortgage.

There are a number of ways to protect against that. A lawyer can advise you further, but some of the techniques are:

-->You make your check out to the mortgage company the seller is paying. Then you'd write out a separate check payable to him for any excess. Example: His payments every month are $1,000. You're being charged $1,300 a month. You'd write two checks: The first to the lender (like Bank of America) for $1,000 and a second check for $300 to "Joe Smith."

-->You set up an arrangement with a lawyer, title company, or settlement company. You pay them. They then divide the money, sending the mortgage amount to the lender and the remainder to the seller.

-->The owner puts the property into a land trust. You send your payment to the trustee who, as in the example above, divides the amount, sending the proper amount to the mortgage company.

-->The weakest way is for the seller to sign a document called an "Authorization to Release." That allows you to contact his lender and find out the current status of the mortgage. It won't ensure that the mortgage gets paid, but you can find out quickly if it isn't being paid.

In one of your follow-up questions, you asked how much some of the recommended services cost. That varies, depending on who's doing it and what you're having done. But, for example, recording the contract for deed is inexpensive. You can do it yourself. There probably are some filing fees, but we're talking maybe $10-$25. Title work? A settlement company could tell you. Not much. An appraisal? Several hundred dollars. I'd really just suggest you go to a real estate lawyer and let him/her handle all that for you.

Regarding your second follow-up question about an extension of the contract for deed: If the seller agrees in writing that he's willing to extend it beyond five years, that's fine. However, a lawyer can tell you how to best structure it. With something stretching on that long, a lawyer might suggest that after 5 years, if all payments are made on time, that the deed be transferred to you and that the remainder owed be handled as owner financing.

And you should have a lawyer review the entire document to protect your interests.

Hope that helps.
1 vote Thank Flag Link Fri Jul 2, 2010
Don Tepper, Real Estate Pro in Burke, VA
MVP'08
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One way to ensure that the payments will be applied to the mortgage is to have the title company to set up an escrow servicing account to process your payments. This will protect both you and the seller, and it will provide a neutral third-party record of the payments that will be helpful if/when you'd like to refinance.

If there's at least 1 mortgage on the property, then you'll need to make sure that the terms don't collide with the terms of the land contract.

You should get the seller to add that renewal provision as a performance clause in that land contract.
1 vote Thank Flag Link Fri Jul 2, 2010
Hi, Dawn! Most likely the agent fees would be similar to a facilitator. I don't work in your area, so you should talk to some agents over the phone to see how much they would charge you for this service. One of the first things we learn as agents in real estate school is that when someone asks what's the commission on this, the answer is "It's negotiable".

And, one of my colleagues here points out that, if there's a current mortgage on the place, make sure the payments are being made to avoid a disastrous foreclosure scenario. That would be the reason to make sure YOUR new cd is recorded with the county. That would suggest that any other mortgages on file have either been satisfied or that the seller's lender is aware of your arrangement with them and the sellers' lender has consented to this cd. That's VERY rare!!! Usually if the seller has a mortgage, their lender has a "due on sale" clause in the mortgage. That means THEY have to pay off their current mortgage in order to transfer title of the property to you. If that's NOT going to happen, then you have a different scenario similar to a "rent to own" , not a seller cd. That's how you can get in to trouble, because if the seller does not keep up with their payments, the property will be foreclosed on and your money you're paying monthly toward a downpayment will be lost and so will the property. Caveat Emptor (buyer beware and be Aware)
0 votes Thank Flag Link Fri Jul 2, 2010
Make sure you have a lawyer help you with this. I have seen many of these go bad. Be careful.
0 votes Thank Flag Link Fri Jul 2, 2010
Dawn make sure that if there is a mortgage the owner keeps paying it and you do not lose out because the property gets forclosed on.
0 votes Thank Flag Link Fri Jul 2, 2010
okay but if he puts it in the contract that we will renew it in 5 yrs. if all payments are made on time
0 votes Thank Flag Link Thu Jul 1, 2010
Any Idea of how much it would cost to have someone do this, like a lawyer or realestate agent?
0 votes Thank Flag Link Thu Jul 1, 2010
All good advice! Make sure the cd is recorded with the county, just like any other mortgage. Depending on your level of expertise, I would suggest seeking some legal advice or, at least, have an agent helping you that has experience with cds. Do you have an agent? This should be handled like any other sale with all the proper disclosures and so forth. Make sure you're protecting your best interests as a buyer!!!
0 votes Thank Flag Link Thu Jul 1, 2010
Here are a few things to consider. First, you should run title work on the property to see what the current owner owes. Secondly, you shoud have an appraisal done to see how realistic the contract price is to reality. Third, you need to have a lender review your current financial condition and give you real feedback on your ability to finance the property in the next 6 - 12 months. Fourth, make sure the contract for deed is a legal document which can be enforced. Fifth, make sure you have the agreement recorded to ensure your position.
0 votes Thank Flag Link Thu Jul 1, 2010
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