Why Aren’t Contracts for Deed More Popular?

With interest rates in the toilet and the stock market having already almost doubled from its 2009 low, you’d think that there’d be more takers for contracts for deed.

An alternative to bank-financed mortgages, they allow Buyers with tarnished (or too-brief) credit histories to buy, and Sellers to sell and earn 5% – 6% on their money.

The caveat? 

The Seller receives regular monthly payments rather than a lump sum.

Stumbling Blocks

That works if the Seller owns the house free and clear, and would otherwise be putting their sales proceeds into a low-yielding investment.

However, if they plan to use the lump sum for something else — like to buy another property — the CD option doesn’t work.

A CD also doesn’t work if the the Buyer can’t come up with a significant down payment.

That’s because if the Buyer stops making payments, the Seller gets the property back — perhaps not in such great shape and/or in a punk housing market.

To compensate for those twin risks, Sellers rightfully demand a hefty downpayment — often in excess of 10%.

Cue:  The Parents

So, where does that money most often come from?

Drum roll, please .  . . . the parents.

I heard a presentation on contracts for deed today where the speaker noted that many parents think nothing of paying for a wedding (ave cost:  $30,000), but balk at applying the same amount towards a house down payment.

“Given that 50% of marriages fail, but only 10% of CD’s default,” he continued, “the contract for deed would appear to be the safer bet.”

P.S.:  So, how many Twin Cities homes now sell with contracts for deed?  Extrapolating from Edina Realty’s numbers, about 2% — up from 1% last year.

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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