No matter what you call it — Contract for Deed, Lease to Own, Seller Finance – these non-traditional real estate transactions come with risks that are often not fully understood by the parties entering into these contracts. In this post, I am going to discuss three real contract for deed horror stories that were experienced by real potential clients that have visited my office.
The Surprise Mortgage
In this situation, the client entered into a contract for deed several years ago. He made all the payments on the loan and asked the seller to execute a deed transferring the property. Upon reaching out, the buyer discovered that the seller had obtained a mortgage on the property just a few months before the buyer made the final payment. Because the contract for deed transaction was never recorded, the bank had no knowledge that anyone other than the seller owned the property. Now the buyer is looking at spending a significant sum of money on litigation to try to clear up the ownership issues and will likely never be able to recover the full amount he spent on the property.
The Big Short
In this situation, the buyer and seller utilized a local notary to prepare the paperwork for the transaction. The basic agreement was that the buyer would take over the payments on the existing mortgage and there would be no additional interest charged by the seller. However, the contract was drafted to state that the buyer would make a monthly up payment with no interest. As a result, a few years later the buyer had a balance remaining that was almost $40,000 less than the balance remaining on the seller’s mortgage. As such, the seller is facing a situation where they will have to come up with a significant sum of money when the buyer has completed the terms of the contract so they can deliver clean title to the buyer or they will have the possibility of a law suit being filed by the buyer for breach of contract.
Ambiguous Equals Expensive
In this final situation, the buyer and seller hired a title company to prepare the contracts for a seller finance transaction. The title company used their standard real estate sales form and attempted to add a single sentence to modify the agreement to reflect the terms of the agreement. The result was an inconsistent contract that did not make it clear if the buyer was entitled to an ownership interest in the property. A few years later when the buyer stopped making payments, the seller retained an attorney to remove the buyer from the property. Beacuse the ownership interests were not clear, the seller had to engage in many months of litigation to determine exactly what interest each party had in the property. Much of this litigation could have been avoided through the use of proper contracts.
Contract for Deed Horror Stories Conclusion
The lesson to be learned from these stories is that the risks involved with a contract to deed or lease to own sale are significantly higher than a standard real estate transaction. Although real estate agents may have a wealth of experience drafting standard real estate contracts, their experience is usually much more limited with these types of situations. The same can be said for title companies or notary services that offer to provide you with standard form contracts. By utilizing an experienced real estate attorney to draft the paperwork, you can ensure that you don’t become the main character in one of these (or the many other) contract for deed horror stories.