We were recently approached by a potential client who was buying a house and piece of ground from a dear friend. Neither party wanted to spend the money for an attorney to finalize their agreement, so they attempted to draft a contract for deed on piece of paper. Contracts for deed are a form of seller-financing of real estate. They are seen as an alternative to a seller-financed transaction in which the seller actually deeds the property to the buyer by signing, with the buyer signing a promissory note and deed of trust in favor of the seller. In the situation of our potential client, the handwritten agreement did not contain many of the essential terms of a valid contract. The writing did not list the total purchase price, it did not list the monthly payment amount, it did not state whether interest was to be paid, and it did not state what would happen if the client missed a payment. To further complicate matters, the seller actually deeded the property to the buyer, without the buyer’s knowledge and then died before full payment was made. It seems certain that a lawsuit will be filed by the estate of the seller.

Contracts for deeds are sometimes called a “contract for a lawsuit” because of the inherent problems with them. Under a contract for deed, the seller retains ownership of the property until the buyer has paid the purchase price in full, which is usually set to occur several years in the future. The buyer is in possession of the property, but has no indicators of ownership because there is no deed in the buyer’s name and they are not listed as the owner on the county tax records. These transactions can provide a great number of risks for the buyer. For example, the seller may not be able to provide a deed when the property is is finally paid for, due to divorce, disability, death or some other dispute. The seller may have defaulted on the property taxes and the property has been sold at a tax sale without the buyer’s knowledge. Or, the buyer may have failed to obtain title insurance and may purchase the property from the seller, who is unable to provide clear title at the end of the transaction.

There are some risks to the seller as well in a contract for deed. The buyer may not properly care for the property, and if returned to the seller, the seller may have lost considerable value due to neglect or damage caused by the buyer. The seller may have to file a lawsuit to get the buyer out of the property if the buyer has quit making payments. There may be a dispute as to who is entitled to insurance proceeds if the property is damaged by fire, wind or other harm before the purchase is completed.

What happens if the buyer fails to make payments? Under a conventional transaction, where the seller deeds the property to the buyer, taking back a promissory note and a deed of trust, the seller simply forecloses. Under Missouri law, foreclosure of a deed of trust normally takes no more than 12 weeks and does not require a lawsuit. Foreclosing a contract for deed often requires a lawsuit, which may take six months or more.

If a seller wants to work with the buyer, but does not want to enter into a conventional sale, a lease with an option to purchase is often better than a contract for deed. The seller has the protection of Missouri landlord-tenant laws in this scenario and can always agree to credit rent paid against the purchase price.

If you need legal assistance, or for further information about a real estate need, please contact our experienced real estate attorneys at (573) 686-2459. Our commitment is to earn your confidence by answering all questions and providing quality representation.