WLCCI

Agreements for Deed (Land Contracts of Contracts for Deed)

This form of seller financing is quite popular in some parts of the country, yet practically unheard of in others. It calls for the purchaser to pay for all or most of the property before he or she receives legal title. In its simplest form, an agreement for deed works like a mortgage, except that legal title does not pass until a predetermined and stipulated number of payments have been made.

Theoretically, it provides additional protection for the seller because in the event of default, where the purchaser does not make the payments as agreed, the agreement for deed usually stipulates that the money paid to the date of default is deemed to be rent for the period from the term of possession to the date of default.

No foreclosure is necessary. Technically if default occurs, to clear the title especially if the agreement for deed or an affidavit and memorandum of agreement have been recorded in the public records, a quit claim deed should be given by the purchaser to the seller to release the purchaser’s equitable interest in the property.

When an agreement for the deed is used, the contract will call for specific dollar payments, usually monthly, with the money applied first to interest on the purchase price, then to charges such as real estate taxes, insurance and special assessments, if any, then to the unpaid principal balance of the purchase price.

The contract may call for these payments to be made for any agreed upon time, such as a year or even thirty days, before legal title will pass. If the contract states that the legal title will pass before the principal balance is paid in full, a “balloon” payment will usually become due, although the seller could take back a note and mortgage in lieu of the balloon payment.

Some people believe that an agreement for deed provides a legal way around due-on-sale clauses found in many mortgages. Not so. The due-on-sale clause is triggered by any transfer of legal or equitable title to real estate. While legal title is not transferred with an agreement for deed (until the stipulated number of payments have been made), equitable title has passed.

From a practical standpoint though, the due-on-sale clause is not triggered because no deed has been conveyed and recorded and insurance continues in force in the name of the seller. It is unlikely (but not impossible) that the lender would learn of the transaction.