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Creative Contract is Home Sales Incentive

When it comes to getting what they want, most home sellers are an anxious lot--the sooner the better at the maximum price, right? But what if you're having trouble selling, and an interested buyer comes along who can't qualify for a traditional mortgage? One creative solution to your problem is an installment sales contract, according to Benny Kass of The Washington Post.

The land sales contract, also known as a contract for deed or installment contract, has its roots in the Wild West of the 1800s. A rancher would sell a piece of property to his employee by taking a down payment followed by monthly payments. Once his employee paid in full, he transferred the title, a deed was recorded, and the employee became the owner.

Today's version is a departure from the traditional, everyday method of selling outright to the buyer. Under an installment sales contract, the seller continues to hold legal ownership of their property but transfers the obligation of paying mortgage, tax and insurance to the buyer. That's good news for the buyer who's having a hard time qualifying for a mortgage. The buyer moves into their dream home, becoming the "equitable" owner. But the seller retains legal title until the buyer pays off their obligation. It's obviously not for everyone but worth considering if circumstances demand an innovative approach.

It works best when the seller has a loan that's assumable. Be sure to check your loan document. If it has a "due on sale" provision, then your loan is probably not assumable and your lender could call the loan due when you sell. Time to reconsider the land sales contract. Under the circumstances, you may be able to work with the lender but you will need to decide if it's worth the potential hassle.

Assuming the assumable loan issue is resolved, your situation might proceed as follows. You have a $100,000 sales price. Your buyer can afford a 5 percent down payment. Buyer pays you the $5,000 down payment and signs the land sales agreement contract which, among other things, allows the buyer to live in the house in exchange for paying you the $95,000 balance over a mutually agreed upon period, typically seven to 10 years. The actual amortization period in the agreement is typically longer, usually 30 years, but the buyer would be required to pay in full and obtain title sooner, within the seven to 10 year payoff term.

Be sure to explore all the complexities with an experienced real estate attorney. For example, there are two settlements involved. At the first, you sign the deed and the settlement attorney or title company holds the deed in escrow. The second settlement happens when the buyer has complied with the contract, paid you in full, and the deed is recorded in the buyer's name.

As part of the contract, buyers and sellers will need to agree on what happens if the buyer defaults. Will the buyer move out? What happens to the payments received to date? In addition, buyers will probably want some proof that all their payments intended for mortgage, insurance, and property taxes are indeed being passed along by the seller. Obviously, no buyer wants a tax lien placed against their home.

The legal transaction of selling a home involves high financial stakes for both buyer and seller. Each party should employ their own legal counsel to carefully craft an agreement that covers all the bases. Be sure to consult a tax advisor, too.