The Contract for Deed is still a great vehicle to finance the purchase of property. However, Buyers should be aware of financial traps (read Part 1 and Part 2).
1) Down Payment: A Contract for Deed usually requires this, but it should be a reasonably small amount and not force the Buyer to tap a line of credit or take on other debt. If the Seller requests a five figure down payment, consider the deal unfair.
2) Monthly Payment Amount: Can the Buyer afford the monthly payment, taxes and insurance? The #1 reason for default under a Contract for Deed is a missed payment. If the Buyer falls behind the bills, the Seller can legally cancel the Contract for Deed and leave the Buyer with nothing.
3) Interest Rate: With traditional lending rates hovering in the low 4% range, a Buyer under a Contract for Deed should expect to be in the 6-10% interest range. Think twice about any rate higher than 10%.
4) Purchase Price: Unlike interest rates, a Buyer should not pay more than the fair market value for the home. Get an appraisal prior to entering into a Contract for Deed. This ensures the Buyer pays a fair price. Also, it cuts the risk of squelching the balloon payment. If the property is overvalued when signing the Contract for Deed, then the required balloon payment might be more than the value of the house. Traditional lenders no longer lend in amounts above the value of the home.
A Contract for Deed allows a Buyer to save their house when traditional financing is not an option. However, they should strongly consider consulting an attorney to make sure they get a fair deal.