How Does a Contract for Deed Work?
At settlement, the Buyer pays the down payment and closing costs and signs a Note payable to the Seller for the balance. The buyer takes possession of the property. Both parties sign the Contract for Deed and related escrow agreements.
So far, the transaction looks like a regular settlement. The difference is we hold the Deed and Release in escrow. When the Buyer pays off the loan through a sale or refinancing, a Deed is recorded to the the Buyer. The Seller signed all documents required to transfer title at the first closing. It doesn't matter if he later moves from the area, dies or is otherwise unavailable.
The parties also sign a Release. This protects the Seller against the Buyer's default. If the Buyer defaults, the Seller can record the Release terminating the Buyer's interest in the property and taking the property back. While no Seller really wants the property back, and no Buyer intends to default, this is a very quick and effective means to deal with a defaulting Buyer. (Our experience has been that very few Buyers default on their Contract).
The Buyer makes the monthly payment to the existing lender on behalf of the Seller. This is sometimes called a wrap-around contract because the second loan "wraps around" or includes the first. Usually the Buyer will send the payment directly to the lender. On-line banking makes this easy and anonymous and both parties can go online to check the status. See the next page about wrap around loans for more information.