Also called a land contract, bond for deed, agreement of sale, or contract of sale, a contract for deed is a form of financing used primarily between individual lenders and borrowers, not with banks or savings institutions. A contract for deed is not accompanied by a note but is a single complete agreement, granting physical possession to the buyer-borrower-vendee at the same time that it establishes the financing agreement with the seller-lender-vendor. The bond for deed phrase is still used today to describe a seller financing with deferred title transfer, but it is an archaic format that is virtually never used in modern times. In the traditional bond for deed, the seller secured a bond that named the buyer as the beneficiary. If the buyer made all the payments, but the seller failed or refused to convey good title, then the bond would pay a predetermined sum of money to the buyer. It was a method of protecting buyers.
Contracts for deed are usually employed in situations where the seller of a property is helping the buyer complete the purchase by carrying back a loan for a portion of the seller’s equity in the property. In such a case, a contract for deed is executed between the buyer and seller for the amount of the seller’s equity. The legal fee simple interest remains in the name of the seller, while the buyer secures an equitable title in the property as well as its possession and control. When the terms of the loan contract are met, the seller delivers a deed to the buyer, the recording of which is evidence of the loan’s satisfaction.
Some pitfalls of the contract for deed form of financing include
providing for transfer of title on seller’s demise before contract’s satisfaction;
providing for protection of title in case of litigation against seller; and
determining priority of intervening liens.
Maintaining legal title in the collateral during the term of the loan gives the seller certain foreclosure powers not available in either the mortgage or deed of trust forms. Basically, the buyer’s redemption periods are dramatically reduced, sometimes to as little as 30 days. Certain states, fearful that this foreclosure power may be used arbitrarily or capriciously, prohibit or seriously inhibit the use of contracts for deed as a form of financing.