Installment Contract for Deed
A Great Alternate Financing Option to Consider: Installment Contract for Deed. Here is an example of how a land contract could work for a buyer and seller based on a 20-year period with a balloon payment due after 5 years.
The purchaser would agree to purchase the home and to pay the seller a sales price of $439,000 in the following manner: $20,000 at the execution of the contract and and the balance of $419,000 together with interest on portions thereof as shall remain from time to time unpaid at a rate of 7% per annum, until paid full. Said principal and interest shall be payable in equal monthly installments of $3,248.50 per month beginning on 5/1/2012; provided, however, that the entire unpaid balance is due and payable on the fifth anniversary of this land contract.
The buyer would not receive title until 5/1/2017 when the balloon payment was due. The payments up to that time are amortized based on a 20-year period. At the end of the 5-year period the buyer will have to refinance the purchase price, probably by a conventional deed of trust, in order to make the balloon payment. When the buyer pays the seller in full, the seller will convey title by deed to the buyer.
In North Carolina the seller is required to record the contract for deed within five business days of execution. The seller is also required to provide the buyer with an annual accounting stating the amount paid under the contract, the amount still due, the number of payments remaining, amounts paid for taxes and hazard insurance, and any outstanding balance of any lien on the property. Late fees may not exceed 4% of the payment due and the payment must be at least 15 days past due.
The seller under an installment land contract many see a number of advantages in selling by this method. Income tax advantages flowing from the installment sale of the property may appeal to sellers who need tax relief. The seller still has bare title and holds the deed to the property for security. If the purchaser defaults on any of the obligations specified in the contract, then the seller must provide written notice specifying with particularity all breaches/defaults claimed, and allow the purchaser not less than 30 days to cure the default(s). If the purchaser fails to cure the default and will not voluntarily surrender possession, the seller may be able to both obtain clear title to the property once again and also retain all payments previously made by the buyer.
The installment land contract offers a number of advantages to the buyer. The availability of an alternative means of financing during times of tight conventional money supply, the down payment is often lower and the closing costs can be less. The buyer also may be able to claim the usual tax advantages that owning real property brings.
I think we are going to see this type of contract from sellers as a creative and viable way to sell their real estate to buyers who need a different method of financing.