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| CRE Online > Real Estate Law > Bill Bronchick > Question and Answer |
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Question by Steven Wolford:
I am a tenant of a 9 unit apartment complex in the state of Florida and have been offered by the owner a "contract to deed" purchase of the property for a term of 3 to 5 years before I would seek conventional financing. The owner has recently refinanced this property and says that this would be the best way for him to sell. He also offered a "no" money down option. This all seems to be too good to be true for us. We have been wanting to get into investment properties for a long time, but this is our first and we are not sure of the pitfalls that we should be looking for. Also, we considered offering (since he did ask for us to try and make some sort of down if possible) the monies held for securities, last months rent, or the first months rent of the contract (since we should not have our first payment due in thirty days) as the down. p.s. We know he does NOT plan to report this sale to the mortgage company. Answer By William Bronchick: The contract for deed is an installment sales agreement wherein the buyer makes payments in a manner similar to a mortgage. The buyer has "equitable title." The seller holds legal title to the property until the contract is paid off. The buyer has equitable title, and, for all intents and purposes, is the owner of the property. There are some pitfalls, however. If the seller has liens or judgments on the property before conveying title, he may not be able to perform. It is recommended that your contract be recorded. Also, the lender on the underlying loan may discover the transaction and call the loan due. This is not likely to happen if interest rates do not rise more than a few points and the loan is performing. This brings up another point - what if the seller does not pay on his underlying loan? The answer is, the lender will foreclose, putting your position in jeopardy. It is recommended that you set up a payment escrow with a third party, who will collect your payment and pay the seller's loan, the taxes and insurance. The contract for deed (aka "installment land contract") is an effective tool for buying property without qualifying for a new loan. Just make certain you hire competent legal counsel to represent you in the transaction. Disclaimer: The foregoing is not intended to be given as legal, financial or tax advice, but intended for instructional use only. If you require legal, financial or tax advice you should seek the assistance of a qualified professional.
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