Contracts for deed are agreements that outline the process for an eventual purchase of property. Such a contract does not bestow a property title on the intended buyer. Instead, it establishes the terms under which the buyer will remit payments to the seller, often specifying a start date for this action to take place, as well as an ongoing schedule once payments have commenced.
Essentially, a contract for deed can be understood as a form of sales contract. It acknowledges the desire of the buyer to purchase the property, as well as the desire of the seller to work with the buyer. Often, the actual terms of the agreement will defer payments for a period of time. For example, the seller may defer the receipt of a lump sum down payment on the property for a period of 12 months, while the buyer begins to make monthly payments on the main balance upon taking up residence on the property. At the end of the deferral, the buyer provides the down payment to the seller and receives full credit for all forms of payment made up to that point in time.
A contract for deed can be a workable situation for someone who wishes to acquire property, but who is unable to come up with the down payment. If the seller is reasonably sure that the buyer is able to make regular monthly payments and can save the down payment over a period of time, he or she may choose to enact the contract, allow the buyer to live on the property, and begin to make monthly payments. The seller still retains all property titles until such time as the buyer has fully satisfied all the terms of the sale.
At no point should a contract for deed be viewed as on a par with an actual title to the property. In the event that the buyer is unable to comply with the terms of deferment outlined in the contract, any monies received up to that time are often considered to be rental rates, and the seller retains full control of the deed. If the buyer is able to secure funds to meet the terms in advance of the end of the deferment period, however, the seller is normally willing to work with him or her to consider the agreement fulfilled and move on to a more traditional mortgage arrangement.