An agreement for deed, also known as a “bond for deed," “land contract” or “installment loan contract,” is a type of real estate transaction in which the seller essentially finances the buyer in the sale of her own property. In an agreement for deed arrangement, the buyer takes possession upon the signing of the agreement, often with no or a token down payment. The buyer then pays the mortgage in monthly installments. An agreement for deed is fulfilled once the buyer has paid the full purchase price. The statutes governing these types of transactions will vary by jurisdiction is the US and by country in common law countries.
Agreements for deed can be completed much faster than traditional mortgage arrangements. There are no forms other than the agreement itself and no closing costs or other fees. The seller retains legal title to the property but also has the same responsibilities as mortgage holder in possession of the property. The seller must pay property taxes, maintain the property, and keep it insured against damage. In some states, the buyer can claim a homestead tax exemption on the property.
In an agreement for deed, the seller maintains a security interest in the property. If the buyer runs into problems, the seller can cancel the agreement, take possession of the property, and keep any installment payments as damages. The rules for cancellation vary from state to state. In some jurisdictions, an agreement for deed can be canceled with as little as sixty days notice. Unlike traditional mortgages, there is no right to redeem the property, and it can be sold to someone else upon cancellation of the agreement.
Other features of some agreements are a “balloon payment” of a lump sum as the final payment under the agreement. If the buyer is unable to finance the balloon payment or otherwise find the resources pay it, the seller may cancel the agreement. The seller may also use the property as collateral during the life of the agreement, possibly interfering with the buyer’s future ability to obtain a clear title.
Some legal and financial experts argue an agreement for deed is not really a form of mortgage at all but rather a kind of “rent to own” contract. They feel that such agreements leave little protection for the seller or the buyer. Some argue that these agreements no longer have any purpose in modern financing.
Others, especially advocates of low cost housing for low to moderate-income families, argue that agreements for deed serve a very important purpose. They argue that this type of property transaction gives those who have little or no hope of obtaining a traditional mortgage the chance to buy a home. They also point out that when these transactions are done with the guidance and assistance of housing organizations and developers of low cost housing, they can create homeowners and help stabilize declining neighborhoods.
