Ins and Outs of Contract For Deeds or Lease-Purchases
Ok, let’s face it lease purchases are out there and with the market where it is, they are popping up more and more.
Below you will find tips on Contract for Deeds (CFDs) and a great Pros and Cons List for Buyers and Sellers.
My best tip for a mutually successful and beneficial CFD transaction is to do it above board.
– Use separate lawyers, a title agency and an escrow company. Anyone who hesitates to use any or all three should cause you to stop and carefully reconsider: there is a huge red flag on field.
– The lawyers will help you understand, review and prepare the documents and title to clear and process it. The escrow company can manage both intake of payments and out takes to lenders; and HOLD the warranty deed to transfer upon completion of contract.
– Think Long-Term – Please, consider the long-term vs. short-term gain and risk before signing a CFD or lease-purchase. Best fit properties around Casper for CFDs:
• Trailer Sales
• Land Sales
• Manufactured Home Sales
• Non-Traditional Sales like when a home is potentially in financial trouble
The Pro List for Buyers:
1. You don’t need a bank.
2. Your credit doesn’t need to be great to buy CFD.
3. You can afford the payments but just don’t qualify for normal lending options.
4. The home you want requires so much down, like the 20% for a trailer or land, that this allows a faster purchase for you.
5. You aren’t paying rent. Your money is going towards owning a home.
The Pro List for Seller is:
1. You get a large money sum down-usually 10% and a minimum $5000. This helps if you are behind on your payments so you can get caught up. This helps renovate the home if you end up taking it back.
2. You almost always take the home back. This means you might be in a better market to resell. This means you might be able to CFD with money down again.
3. You are the bank and set the interest rate. This is typically at least 1% over normal rates.
4. You often save realtor fees to sell.
5. You typically make more per month than renting alone.
The Con List for the Seller is:
1. The risk of harm to your property is real.
- Cleaning, Clearing and Fixing damage is a real possibility.
- Damage, Damage, Damage can be done fast and cost much more than the money down. If the home is theirs to improve, some improvements are actually a harm.
2. The risk of missed payments, no insurance and unpaid taxes is real.
3. The time it takes to realize gain is longer than an outright sell.
4. Your financial situation may change during the contract period but your options on the property won’t.
- This means it is still included in your debt ratios.
- Missed payments still ding your credit.
The Con List for Buyer is:
1. You will need a large money sum down payment-usually 10% and a minimum $5000. This is money you will never see again, ever.
2. There is a reason this property is being sold CFD. Typical reasons sellers decide to sell CFD are based on MONEY and/or CONDITION such as the following:
- This is a career for some, especially in trailer sales. The seller is making money off you since you are paying more than rent.
- The seller wants to make more than the market will bear. This means the home is either: Worth less than they owe or the seller wants more than it is actually worth. CFD’s on homes sell much, much higher than on the open market. Consider 10%-20% higher to be normal.
- Seller can’t sell it traditionally. A condition issue such as foundation or roof can exist that the seller can’t fix but needs to sell, for example. MOST CFDs have limited lending options and that is why they can’t pull the seller’s desired price. Buyers very rarely fulfill the terms and sellers almost always take the home back.
3. This means you lose the down payment and all monies paid.
- You do not have the same fix it or redemption rights.
- Even a single missed payment can be grounds to escalate the entire balance owed within 30 days—meaning you can’t catch up and that hurts a lot.
- Do not think you are the exception. Stats support that 50% of all people struggle to make rent or mortgage in a 2 year time period. 80% struggle at least once within 8 years!
4. The seller is the bank and sets the interest rate
- This is typically at least 1% over normal rates.
- I have seen rates over 50% more than regular bank rates. This is very common, in fact I am hearing 10% this week.
- Higher interest means a higher monthly payment and more money you are spending that is not going towards actually buying the property.
5. Your realtor is often not involved, which means you don’t have an advocate on your side.
6. Let me stress this: nothing in your contract protects you!
- A normal contract favors the buyer and their protection. Even if you use a lawyer, the terms for CFDs will heavily favor the seller.
- You typically pay more per month than renting alone.
Thank you for learning about CFDs and lease-purchases! I am here to provide real estate advice for every situation. Our mission is to provide excellent personal real estate so don’t hesitate to call and ask us questions!