Contract for Deed – Its Background and Purpose – Part 1 of 5

As the title suggests, this is the beginning of a five-part discussion about contract for deeds.  In this series, I will discuss several topics relating to this contract, including the four remedies that a seller has upon borrower default and why most Georgia attorneys do not recommended this type of agreement for either buyers or sellers.  I begin by providing a description of a contract for deed, its background and application.

A contract for deed is an archaic legal contract, which is seeing recent revival.  Originally referred to as a bond for title, a contract for deed can be called several other names including a land contract, agreement for deed or installment sales contract.  Under Georgia law, all these agreements are treated synonymously. 

When a seller of real estate agrees to finance some or all of the purchase price to the buyer, he may use a contract for deed.  While a contract for deed is one way of many to “seller-finance” a transaction, many sellers find it advantageous for the reasons outlined below.  Other ways to seller-finance include a mortgage, security deed or lease-option contract. 

Many sellers are attracted to a contract for deed because it allows the seller to maintain legal title (and thus some control), while granting the buyer “ownership” in a real, but unusual sense.  In a typical contract for deed, the seller retains legal title until the buyer completes most or all of the required financing payments.  At the conclusion of the required payments, the seller agrees to transfer legal title (deed) to the buyer.  Therefore, it earns its name – a contract for deed.  It may be helpful to compare a contract for deed to a car loan, in which the bank maintains possession of the car title until all payments have been made.  Therefore, while the borrower has possession and use of the car (the property), the bank maintains the legal title to it and thus some rights.    

Real estate professionals use a contract for deed because they believe that it is a quick and affordable way to finance a transaction without the burden of a mortgage, its accompanying regulation and legal costs.  Additionally, they believe, that if the borrower defaults, they can avoid a costly and slower foreclosure process.  Because of this, these contracts are generally entered into with lower credit buyers, in which the seller reasonably believes that the buyer is likely to default. 

When a borrower defaults, most sellers move to retake possession of the property.  This is generally done through a dispossessory (eviction) proceeding.  However, the seller actually has four different legal options.  In next month’s article, I will discuss these four remedies, the advantages and disadvantages of each, as well as the buyer’s rights upon default.