Podcast: Play in new window | Download
Subscribe: RSS
What is a Contract for Deed? And Other Sexy Investor Buzzwords
Recently a colleague asked a question on a Facebook group of which I am a member. The question pertained to a “contract for deed”. Specifically, the “investor” was requesting to acquire a property via a “contract for deed subject to”.
This is a classic case of a tongue-twisted newbie investor, using language that they don’t fully understand. Let me explain:
A contract for deed is essentially a “lease – purchase” arrangement where the seller retains ownership and the deed while the buyer makes payments towards the purchase of the property. During the time the payments are being made, the buyer can often receive additional benefits that are not common in a traditional lease arrangement.
Some of these additional benefits (which are granted by the contract) include:
- The ability to encumber the property, with either debt or permits
- The ability to collect rents from the tenants
- The legal authority to act in the capacity of the owner
- The ability for the seller to retain the tax advantages of owning the real estate
A contract for deed is an agreement between a buyer and a seller on specific terms of a future sale. In any buy/sell arrangement there must be a “meeting of the minds”, which means all parties must come to an agreement in order for a contract to be drafted and enforceable.
Often, buyers and sellers seek the advice of a real estate attorney, which I agree is a smart way of doing business. A good lawyer who has experience with real estate transactions, experienced issues, and corrected them is a valuable member of any investor’s team.
Sometimes we run across attorneys that are close-minded or suspect of everything they encounter. There are situations where these concerns have a solid foundation, and such advice is important to keep you out of hot water. There are other scenarios where the lawyer may lack experience in this specific type of transaction and will then provide advice based on fear of the unknown.
This is why I stress how important it is to hire lawyers that are experienced in Real Estate transactions. A lawyer’s job is to help foster communication and agreement between parties. If you hire a lawyer that feels like a “deal killer”, it might be prudent to seek a second opinion from another lawyer who specializes in Real Estate.
The 70 / 30 rule applies here as well: a lawyer should be listening 70% of the time and asking questions 30% of the time. It is the asking of questions that helps a good lawyer achieve a full understanding of the situation at hand in order to help guide the client with good solid advice.
In my previous example, the attorney replied to the agent’s inquiry with “contracts for deed are rarely used. There is no advantage to them.”
I found this answer shocking. How could this lawyer state there is no advantage to them? Clearly, this lawyer has no background in real estate investing, which means a second opinion from a lawyer with investing experience would be prudent.
Don’t be afraid to question the opinion of an attorney; after all, it is just that, an opinion. Lawyers are human and make mistakes just like you and I, and sometimes you have to check up on the advice they give. It’s just that simple.
This is a clear case where the agent and the attorney feared something they did not understand, resulting in “advice” being provided to a seller that was based in that fear due to lack of understanding.