Contract for Deed Pros & Cons

Some contracts for deed feature large balloon payment requirements for buyers.

A contract for deed, also known as a land contract or installment sale contract, is seller-carried financing of a home buyer's mortgage. In a contract for deed, the home seller keeps legal title to the property until the buyer fulfills the contract's terms. Contract for deed home buyers receive equitable title to their properties giving them many traditional homeowner rights. There are several pros, as well as cons, for home sellers and buyers in a typical contract for deed situation.

Pros for Buyers

A contract for deed may be the only option for buyers without traditional financing options available due to poor credit, no down payment or other factors. Closing costs on a contract for deed are less than on conventional financing. Sometimes, a contract for deed offers better interest terms than conventional financing. Plus, the IRS generally considers a contract for deed to be a sale, meaning the home buyer can deduct any interest paid as mortgage interest.

Cons for Buyers

Because contract for deed buyers don't have full, legal title to their properties they can't use them as collateral for home equity or other loans. Contracts for deed can also be foreclosed or forfeited when buyers default on their payments. The contract for deed forfeiture process is often very short in length when buyers default on their contract terms. In some states, it's also easier for contract for deeds to be foreclosed in comparison to foreclosure of traditional mortgage loans.

Pros for Sellers

Contract for deed home sellers can report their transactions as installment sales on IRS Form 6252. In a contract for deed, taxes on capital gains or profit are paid over the years of the contract rather than all at once. Offering a home for sale through a contract for deed also widens the available pool of buyers and improves chances of a sale. If a contract for deed home buyer fails to make agreed-upon timely payments, the seller can sometimes quickly terminate the contract.

Cons for Sellers

Contract for deed home sellers don't receive their sale proceeds all at once, but only over many years. Homeowners selling through contracts for deed also can't claim depreciation, property tax deductions and similar benefits. If your home already has a mortgage on it and you sell it using a contract for deed you may violate your loan's due-on-sale clause, allowing the lender to call your loan in. Contract for deed homes repossessed by their sellers sometimes suffer depreciation and loss of value as well.

references & resources