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Contracts for deeds, also known as land contracts and installment sale agreements, are arrangements where a home seller provides the financing for a buyer. Over the last few years, this unconventional type of financing has gained popularity.
However, with the rapid growth has come an increasing amount of complaints about the terms of such deals. While a popular last resort for house hunters who cannot get approved for a traditional mortgage, contracts for deeds are largely unregulated and are ripe for abuse.
The most common problems are associated with terms that favor the sellers, including high interest rates and short repayment terms.
Typically, a contract for deed is offered by a seller who doesn’t have a mortgage on the property. The sales price is paid in installments, and often the interest rate is a couple of percentage points higher than market rate and the term is usually five to seven years. This requires the buyer to refinance or make a large balloon payment when the contract expires. Once all the payments have been made, the owner gives the buyer the deed to the property.