Use Of Contracts For Deed On The Upswing, As Are The Complaints

In Minneapolis, Minnesota, the Star Tribune reports:

• Contracts for deeds have nearly doubled between 2004 and 2010 to 1,200. Experts say the actual number is likely three times higher because most contracts are informal and are never recorded.



• But with that rapid growth has come an increasing amount of complaints about the terms of such deals. While a popular last resort for house hunters who can't get financed otherwise, contracts for deeds are largely unregulated and are ripe for abuse.



• Some housing advocates warn that these arrangements have now taken the place of the mortgage scams that contributed to the fall of the housing market six years ago. [...] The most common problems are associated with terms that favor sellers, including high interest rates and short repayment terms.



• Typically, a contract for deed is offered by a seller who doesn't have a mortgage on the property. The sales price is paid in installments. Often, the interest rate is a couple of percentage points higher than market rate and the term is usually five to seven years, which requires the buyer to refinance or make a large balloon payment when the contract expires. Once all the payments have been made, the owner gives the buyer the deed to the property.



• Some sellers tout the low cost of executing a contract because an appraisal isn't required, but that's risky because a buyer could agree to pay more than the house is worth, making an eventual refinancing impossible.

For more, see Seller-financed contracts skyrocket, but so do gripes (An alternative financing form, contracts for deeds are becoming increasingly popular among people who might not otherwise qualify for a mortgage. But buyers need to be cautious of their terms).

(1) Use of contracts for deed and other similar arrangements (ie. land contracts, conditional/installment sale contracts, agreements for deed, lease/options, lease-purchases, rent-to-own, etc.) are among favored methods for scam artists to rip off unwitting homebuyers in real estate deals for property the scammer can't otherwise unload through a conventional sale (due to structural defects, title defects, over-mortgaged/underwater homes, etc.). See, for example:

• Co-Owner Of Racket That Ran 'Contract For Deed' Scam Cops Guilty Pleas To Multiple Charges Of Securities Fraud, Unlawful Merchandising Practices,
• Soured Contract For Deed Deal Leaves Illinois Homeowner Out On The Street, Despite Having Never Missed A House Payment,
• More Contract For Deed Horror Stories - Texas Homebuyers Lose Home To Foreclosure Despite Making All Payments As Seller Pockets Cash & Stiffs Bank,
• Would-Be Buyers In Possession Under Unrecorded Purchase Agreements Say Their Land Was Mortgaged Out From Under Them By Seller.