This is the next article in our series on Oklahoma Contract for Deed.  In the last post, we explored the definition of a contract for deed, the property interest it establishes, and its interplay with the landlord-tenant relationship.  In this post, we will dive into the various pros and cons of using a contract for deed instead of a traditional mortgage.

In short, a contract for deed, also called installment land contract, or bond for deed, involves a real estate transaction where the seller finances the purchase of a property.  While addressing the pros and cons of contact for deed you must look from two separate perspectives: the buyer’s side and the seller’s side. 

Advantages of using a contract for deed in Oklahoma real estate transactions

Substitute to a traditional mortgage:  A contract for deed can help a buyer realize their dream of owning a home, who otherwise may not qualify for a conventional mortgage or not have enough down payment.  Drafted properly with the right terms that are suitable for the buyer, it can be a solid pathway for homeownership for those with credit struggles.

On the other end, a contract for a deed opens up the “buyer pool” thereby increasing the number of potential buyers for the same property. This is particularly great news for the seller who has been struggling to find buyers who qualify for a third-party mortgage.  

Flexibility:  While a conventional mortgage involves institutional lenders who must follow strict rules during the loan application, qualification, and disbursement, the contract for deed is more flexible.  Contract for deed offers more latitude as to the qualification process, down payments, and loan terms – giving more flexibility to the buyer and better control to the seller.  The terms under third-party loans are usually stringent without much flexibility for the buyer

Lower closing costs:  There is no formal loan application, origination, processing fees, or any other high closing costs for a contract for deed.  No matter who pays for the closing costs, it is a win-win for both the buyer and the seller as it smoothens the process and reduces the total cost.  Whether you use a title company or not, the costs for a contract for deed closing tend to be less than a conventional mortgage.

Disadvantages of using a contract for deed in Oklahoma real estate transactions

Property sold as-is:  Under a contract for deed transaction, properties are often purchased without adequate inspection or full condition disclosures.  This can potentially cause future heartaches and expenses for the buyer.  It’s not uncommon for buyers under such a setting to purchase a home as-is which is a mistake. 

In a third-party-financed sale as opposed to a contract for deed, lenders must follow strict requirements for title examination, title insurance, and appraisal.  This usually provides some protection for buyers.

Sellers using a contract for sale may encounter potential risks as well. The closing process in these transactions isn’t as robust as with conventional mortgages.  Thereby a seller could face challenges regarding encumbrances or unresolved conditions down the line.  Such issues may lead to legal suits or disputes from the buyer causing financial and legal burdens to the seller.

Seller retains legal title:  After execution of a contract for deed, the buyer gets possession of the property.  But the seller gets to hold on to the legal title until the property is paid off.

Although the buyer has an equitable interest (title) in the property, such interest is rooted in contract rights and therefore isn’t the type that can be recorded.

On the seller’s side, if the buyer defaults on the loan or violates the terms, the seller cannot simply terminate the loan and forfeit the property.  Instead, he has to go through a time-consuming foreclosure process.  Contacts for deeds are treated the same as mortgages and therefore are subject to the same rules as foreclosure in Oklahoma. 16 O.S. §16-11A.

Payments:  Contract for deed is commonly preferred by a buyer who otherwise may not qualify for a conventional mortgage.  Since the loan is seller-financed, the buyer may have to agree to a higher interest rate or a higher total payment.

Similarly, for the seller, typically under a contract for deed setting, the down payment tends to be lower and payments made in installments – instead of a lump sum where a third-party mortgage company is involved.

OKC Real Estate Lawyer

Whether you are navigating a real estate transaction or facing litigation, Niroula Law is here to assist you every step of the way.  We can help with reviewing and drafting contracts for deed agreements, whether you are a buyer or a seller.  While you are not required to hire an attorney for this process, having the right counsel can help smoothen the process and protect your interests.  Contact us online or by telephone to reach out to a real estate law firm and to speak to an OKC real estate lawyer.