What is a Contract for Deed?
A contract for deed is essentially an agreement between the seller and the buyer that allows the buyer to make monthly payments to the seller, who agrees to deed the price to the purchaser when she tendered the entire amount owed under the agreement. Usually, a contract for deed will look like this:
This Agreement made, this ______________ between ________________, as Seller, and ____________________, as "Purchaser" will terminate on the _______ day of ________________ 20____.
1. The undersigned Seller agrees to sell, and the undersigned Purchaser agrees to buy a certain parcel of real property known as:
and described as follows:
2. The consideration for this Agreement is $___________________, receipt of which is hereby acknowledged, and the Purchaser agrees to pay therefor in installments as follows:
At the rate of $______ per month on the ______ day of each month, until paid. Interest on the unpaid balance at the rate of ____% per annum. The Purchaser shall also pay all taxes, insurance, and repairs on the above property.
3 . The Purchaser is seised of and shall keep general and special liability insurance on the above property in the amount of $_______________, naming the Seller as a loss payee, and shall pay all assessments levied against the above property.
- The Purchaser shall have the right at any time to pay off the balance due under this Contract. Upon full and faithful payment thereof, the Seller shall execute a deed conveying the above property to the Purchaser, or his/her nominee. The Seller shall agree to execute the necessary transfer documents to affect the sale of said property to the Purchaser at such time as the Purchaser may request. The Purchaser agrees to pay the costs for recording said Deed.
- Title to the above mentioned property shall be retained by the Seller until the sale price, together with interest accrued, has been paid in full.
- Should the Purchaser fail to fully perform this Agreement in every respect, and after the expiration of a notice of default of 30 days, the Seller may, at his/her option, revoke this Agreement and retake possession of the above property.
Applicable Law in Kentucky
Contrary to the majority of other states, Kentucky has not adopted laws governing the use, requirements, and enforcement of Contract for Deed agreements. A Kentucky court may enforce a Contract for Deed agreement as a purchase contract, but will also require that the purchaser provide evidence that the seller transferred title to the property or that the seller has the right to possess the property and is entitled to the purchase price. In 2017, the General Assembly attempted to extend consumer protection and disclosure requirements to Contract for Deed agreements, but those sections of Chapter 367 of KRS have been declared void for vagueness and for being overbroad.
In the absence of any consumer protection or disclosure provisions specific to Contract for Deed agreements, a seller of real property has the same disclosure requirements as any other seller of residential property in Kentucky. Kentucky case law regarding purchase contract agreements indicate that such contracts are enforceable as contracts for deed, and are governed by general contract law principles. Because some topics, such as earnest money, payment, and default, are unique to Contract for Deed agreements, the specific terms of such agreements are controlled by their own language.
Benefits to Buyer and Seller
An option for buyers and sellers is to enter into a contract for deed, often called an installment land contract. Many real estate investors will suggest this as a strategy to eliminate closing costs, allowing sellers (who may not have the ability to pay closing costs) to sell their properties and buyers to increase their purchasing power. Additionally, this form of financing may not trigger a violation of the Dodd-Frank Act or the Safe Act for many types of buyers and sellers of properties, particularly residential properties purchased for investment purposes. Buyers will benefit by paying a smaller down payment than they would with a conventional mortgage and the closing costs can be eliminated or reduced if the parties decide.
This arrangement can be most attractive to person buying a home because it gives them time to pay off the full purchase price without applying for a conventional mortgage. This option benefits both the buyer and the seller because the buyer does not have to make a large down payment and a seller with limited liquidity will have the ability to sell his home without an extended closing process or extensive buyer qualifications. For example, if someone wants to sell his house but has a second mortgage (meaning that his mortgage lender must approve the closing), he may not have enough money to pay closing costs. A contract for deed avoids additional closing costs for the seller.
Potential Risks and Considerations
There are many risks associated with Contract for Deed agreements in Kentucky. These risks may involve finances, the inability of the seller to transfer good title, or other legal pitfalls. These are the most common risks we see with real estate arrangements in Kentucky.
Misrepresentations by the sellers. We see these a lot and involve the sellers misrepresenting the property condition, property surveys, or building code violations. A buyer’s attorney must conduct a thorough title search and examine any property restrictions. Buyers should be aware that title insurance would be valid only for the sellers’ period of ownership, and not for any defects predating the contract.
Ability of the sellers to transfer good title. Mistakes, typos, clerical errors, and misapplications of county figures in the clerks’ office are common. Your attorney should conduct a full examination of title to ensure that sellers have good title and are able to transfer it.
Purchase price paid by way of installments. Any defaults on these payments may give rise to serious rights and consequences, including foreclosure/seller repossession of the property. Other purchase terms may involve refinancing, repossession, and/or modifications to the loan if the buyer suffers a financial loss. The seller retains the right to foreclose/repossess the property without further notice. A card on professionals conducting installment contracts is in the chair of the undersigned writer. The contract should comply with Kentucky law, including limits on financing charges and disclosures.
Collection of loan application fees. Loan application fees are prohibited in Kentucky. All fees must be applied to closing costs or the down payment.
Sale of contract. It is common to run into disputes when contracts are purchased and sold by investors. In summarized terms, the purchaser assumes the sellers’ role. All terms of the original contract should apply. Currently, we do not represent buyers/purchasers seeking to assume sellers’ roles.
How to Implement a Contract for Deed in Kentucky
Draft the contract: The contract for deed is an agreement between the buyer and the seller to sell a property. Under the contract, the buyer must make monthly payments toward the home until the purchase price and interest is paid.
Determine your rights and obligations under the deed: Most contracts for deed require the buyer to pay property taxes. For this reason, the buyer needs to know what his liability is for taxes. Are you responsible for all taxes? Are you responsible for only a portion of taxes? A qualified real estate attorney can make it clear what you owe.
Review and sign the contract: Once the terms have been finalized, both parties need to agree and sign the contract in writing. The seller must sign before a notary public. The buyer does not need to. However, both parties should keep a signed copy of the contract for their records and future reference .
Record the contract: The contract needs to be recorded in order to protect the buyer from losing the property in the event of foreclosure. Without recording, the previous mortgage holder is not notified of the buyer’s interest. If the mortgage holder sells the property to a third party, the buyer could lose everything. Recording the mortgage protects the buyer from this outcome.
Make the necessary payments: The buyer is now obligated to make monthly payments on the property. It is important for the buyer to maintain consistent, timely payments to the seller. Failure to do so could result in the loss of the contract, at the discretion of the seller.
Obtain the deed: Once the buyer has made all the payments, she requests the deed from the seller. The seller, in turn, provides the deed as soon as possible.
Common Provisions in Contract for Deed
As with any type of contract, a contract for deed may contain several different clauses and terms. The following is an overview of typical clauses found in contract for deed agreements:
Payment terms. When you enter into a contract for deed agreement, you and the seller would agree on the purchase price to be paid over time in the future. You would typically agree to pay this through monthly payments over the length of the contract (known as the "land sale contract").
Seller’s obligations. As the buyer, the seller is usually responsible for any real estate taxes on the property until the total amount of the purchase price is received from you. Furthermore, the seller is responsible for making any necessary repairs to the property during the life of the contract and for obtaining insurance on the property.
Buyer’s obligation. As the buyer, you are responsible for paying real estate taxes, maintaining insurance on the property, and making repairs. These items are not required by law, but many agreements encourage the buyer to be proactive regarding these issues.
How to Settle Disputes
The dispute resolution provision in a standard Contract for Deed requires the parties to first submit all claims arising from a Contract for Deed to informal negotiations. Unfortunately, not all disputes are able to be settled through negotiations. As a result, specific remedies have been spelled out in a Contract for Deed to be used to enforce the parties’ rights under the Contract.
One remedy the buyer may initiate is a Suit to Enforce Installment Contract. Some buyers bring these claims to Circuit Court subject to a local rule that requires all such claims be heard by a specific Court only. So, if the buyer knew beforehand that the case would be assigned to a judge who was friendly to him under a local rule, then he could file his claim in Circuit Court. A buyer may also bring a claim to have a Contract for Deed equitably converted into a Deed and for rents due and owing.
Another common type of case brought is a claim to enforce a vendor’s lien. Under Kentucky law, a vendor’s lien may be imposed on real estate that is sold via a Contract for Deed to enforce the installment payments. The party seeking to enforce the lien may do so in either Circuit or District Court. The buyer may also suing for specific performance of the Contract for Deed. This claim seeks to enforce the terms of the Contract for Deed by forcing the seller to sign the deed.
The buyer may also seek to cancel a Contract for Deed. Under Kentucky law, a buyer may justifiably rescind a Contract for Deed where there is a material breach of the terms of the agreement. The buyer would typically pursue this claim in District Court. Finally, a buyer also has the option of bringing a claim in federal court for violations of federal statutes. Federal law violations include the Fair Housing Act and the Civil Rights Act.
Contract for Deed Alternatives
There are several alternative financing options available to Kentucky home buyers that are far superior to a contract for deed. Home buyers are often unaware of these alternatives and think that contract for deed is their best option. The following is a brief description of the three most common alternative financing options:
Lease with option to purchase – With this approach, the owner leases the property to the buyer for a period of time and at the end of the lease term, the buyer has the legal right to purchase the property and apply all of the rent previously paid to the purchase price. This type of arrangement is essentially a long-term rental agreement that gives the buyer the security of knowing that the homeowner must sell to them at the end of the lease term regardless of the current market conditions.
Lease with option to purchase agreements are subject to the Statute of Frauds. Essentially, the Statute of Frauds requires all contracts with a term longer than one year, such as a lease with option to purchase contracts, to be in writing and signed by the owner or an authorized agent of the owner. Without a written contract, the agreement can be very difficult to enforce against the property owner.
However, if there is a written lease with option to purchase agreement, the contract can be enforced in court to compel the sale of the home at the end of the lease term . If the owner refuses to sell to the buyer, the buyer can sue the property owner for specific performance, which is a legal term for compelling the owner to perform his or her obligations under the contract. In this case, the buyer would be entitled to an order requiring the property owner to convey the property to the purchaser upon payment of the contract price.
Purchase money mortgages – A purchase money mortgage is the best option for homebuyers. It works like any other residential loan. In this type of loan, a mortgage is made to the buyer which is secured by a lien against the property. The buyer makes monthly payments to the lender to pay off the loan over a period of time.
Vendor financing (a/k/a seller financing) – With this financing option, property owners will agree to enter into a note and mortgage agreement with the buyer in which the buyer agrees to pay a specified amount to the property owners over time. In return, the property owner agrees to subordinate the mortgage to any UCC or other security interest taken by the creditor. These types of transactions are almost always granted on a subordinated basis, allowing the finance company or bank to assume a senior position to protect against default.